East West Bancorp, Inc. (EWBC) Q3 2017 Earnings Report, Transcript and Summary

Good morning and welcome to the East West Bancorp Third Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [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 the 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 Investors Relations site. As a reminder, today's call is being recorded and will also be available in replay formats on our Investor Relations website. We will have question-and-answer session after the prepared remarks and we ask that you limit your questions for two and then set back into the queue. 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 a summary of results on Slide number 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 loan origination growth along with steady asset quality it was indeed a great performance quarter. For the third quarter loans grew by 19% analyzed 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 in the West and a reflection of the underlying strength of the geographic market we operate in. Furthermore, asset quality remains excellent, quarter-over-quarter, non-performing assets declined by 12% to 32 basis points of total assets. And our analyzed 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. Let's go to Slide number 4. As shown in Slide number 4, our five quarter return on assets ranges has been 127 basis points to 149 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 maintain 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 non-interest 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 run-off in money market in 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 rates 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. Loans related to 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 about the fee income for the quarter, I'll skip down to non-interest expense section of the income statement. Total non-interest expense declined by 3% linked quarter and excluding tax credit another investment amortization and the amortization of core deposit intangibles. Adjusted non-interest 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% inline with the full year run rate of 25%. Moving on to Slide 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 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 in our securities bookings expanded by 11 basis points for the quarter and yielded an average rate of 1.99% reflecting higher interest rates, our cost of deposits increased by 4 basis points, similar to the pace of increase for the second quarter 2017. Turning to Slide 10, our adjusted efficiency ratio below 40% and was 39.8% in the third quarter compared to 41.3% last quarter. Through the last five quarters, adjusted non-interest expenses excluding the impact of amortization of tax credit and other investments 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 growth expansion and pre-tax, pre-provision profitability for the third quarter, our adjusted pre-tax pre-provision profitability ratio of 2.32% in the third quarter was up by 5 basis points linked quarter. Over the past five quarters, our pre-tax pre-provision profitability has ranged from 2.03% to 2.32%. And Slide 11 of the presentation, we detailed 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-investments as of June 30, 2017. The growth in the allowance for loan losses was largely due to an increase in the general reserves related to new loan growth during the quarter. Non-performing 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 non-performing loans was largely due to the resolution of payoffs of smaller loans. Our net charge-offs 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 for 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 beginning of the year. Our capital ratios increased by 32 to 65 basis 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 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 from outline of our outlook. Today, we reaffirm our outlook for the full-year 2017, generally unchanged from what we've 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 debt funds rate curve and as such, we expect one more debt funds rate increase in December. That rate in the quarter, however, we do not expect a significant impact to the fourth quarter net interest margins. 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 result, and so now I will just open the call for questions.

We will now begin the question-and-answer session. [Operator Instructions] The first question will come from Aaron Deer with Sandler O'Neill. Please go ahead.

Hi. Good morning, everyone.

Good morning, Aaron.

First maybe on the question of expenses. Dominic, you’ve talked a bit about some of the investments that you're making in terms of infrastructure, risk management, product capabilities and such. As you kind of look out over the coming year, and I realized 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 are anticipating given the outlook?

Well, as we have actually discussed for the last two 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 what we build out a sustainable long-term franchise, we’ll need to continue to putting some upgrades here or there. So that's a given. As an organization we actually never good in measure efficiency ratio is the number that we put it out because everybody else since to be providing that information. So we will more than happy to share that. But as an organization, we run out business by looking at some specific primary drivers. You look at efficiency ratio is 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 non-interest fee income. These other drivers that's very important to us, core related 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 cetera. And then of course, we manage our expenses 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 of these disciplines remain the same. And we continue to run our business in the same direction. So whatever that spell 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 that 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 and obviously the combination of the margin expansion, the loan growth, deposit growth and we still have a strong fee income, et cetera. And so while the expenses have actually continued to sort of like support our investment, but we actually having a little bit dip of the efficiency ration. But the fact is, I look at that 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 are relevant and strategic to our overall core strategy; we're going to do more 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 talents and technology and also in risk management. So step-by-step, we are going to continue to do that, and I expect 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, they were just give us a little more and more opportunity to take a stronger move in terms of making investments. However, if for some reason, in 2018 and 2019 beyond that macro economy slowdown dramatically, which affect the entire banking industry, we obviously [indiscernible] start managing expenses accordingly. So we work everyday, and every single day we're watching these sorts of like key indicators to make sure that we're doing the right thing. So in that respect, I would say that you don't have to put too much focus on efficiency ratio, we're just going to keep managing on the primary drivers get it somewhere in the right place in general to make everybody pleased. So I guess it's my long way of putting answer to your question. I don't know if I answered your question or not? If not, maybe Greg and Irene can try next time.

Thanks, Dominic. And then Irene, I was curious on the tax front. As you kind of look out your tax planning strategy 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 to making over the last year or two? Or is that likely to dropdown 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, has been reduced over the years. So with that and also the changes in the 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 and the timing of that. So I'll share that probably in January when we give our guidance, you can get more updates. But generally speaking, I do think that those investments will come down.

Okay, that’s great. Thanks for taking my question.

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

Great, thanks. Real quick, just on the tax rate, are you see there guidance for I guess the 25%, but your year-to-date is also 25% and I’m just trying to figure how you account for the first quarter, the much lower first quarter tax rate. Did you just exclude talk’s option these in there, such that, obviously, fourth quarter should be 25% as well to get your full-year number?

Yes, so the 25% effective tax rate is for the full year. There are some discrete items each quarter that 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 a 25%

Gotcha, understood. Okay, maybe I could follow-up offline, because I think about put in 27% to full year average of all four quarters, it's considerably less than 25%, given the 18% first quarter? Is that makes sense?

We can follow-up with the account.

Okay, so it’s totally fine. And then just the comments you guys made on commercial real estate, the lower payouts that you saw in the quarter, are they 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 continues, can you just talk a little bit about why you're CRE portfolio might be seeing different trends from other banks? Thanks.

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 03 is a little bit hard to predict. I think when we talked about higher or lower payoffs that was really related to the second quarter. I mean, if you went back to first quarter, where I think we again said we have low payoffs and typically the third quarter was more inline with the first and with the second. The only other thing I would say is when you look at our commercial real estate business that continues to be as I said in the prepared remarks, a lot of our activity has owner-occupied, these are business owners that we may bank or may likely bank more broadly tend to be small size. We’re not generally oriented or the bulk of our portfolio is not oriented towards the large investor owned real estate properties. So some of those differences potentially could continue to our different banks saw the quarter.

All right, great. That’s helpful. Thank you very much.

And the next question comes from Jared Shaw of Wells Fargo Securities. Please go head.

Hi, good morning. Thanks. Following up on the expense side, maybe coming out a little different way, some of investments that you highlighted and infrastructure and network risk management, new hires, is that already started or is that something that will be incrementally new investment process that we should expect as we go into fourth quarter but also going to 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, our program and our approach is to not full go back, but to keep investing, reinvesting some of the allocated spend. We had 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 will 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, as Dominic noted, the investments fall into two broad buckets right. There's 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 had 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-digit, 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 where we just talking about.

Okay, great. Thanks. And then on the loan side, the first point is CRE, owner-occupied CRE, do you still classify that as CRE or C&I? It sounds like it maybe in the CRE bucket.

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 – it sounds like 11.5% and you talked about fourth quarter maybe being a little slower than third quarter. Where are you seeing maybe that incremental weakness on growth as you 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 three quarters. I didn’t get the number. And 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 stand 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.

Okay. Thanks a lot.

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

Good morning, guys.

Good morning.

Just want to sort of touch upon sort of deposit pricing competition and just get your thoughts in terms of – we've seen some like run off in money market and time deposits and you’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're 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 you saw that in how the deposit mix shifted during the quarter, and we focused on those core deposit categories. We are being – we're leaning in and 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 I think as we said before, we 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 that core deposits. We’ve been comfortable letting some of those run-offs and not competing as much on price there where it's, obviously, more of a transaction.

Understood. That’s helpful.

I think make it simple, we really haven't done any promotions, we really have not really walk on to just mix like 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 to grow business. When you grow business, you get the offering accounts, you get some of these core deposit accounts 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-off on CD for years. And then with grow of the 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're able to grow our deposit overall, and as Greg mentioned earlier, the average deposit balance growth during this last quarter was still pretty attractive and clearly on pace to match to 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 or the last few years? Just to frame it and I realized 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 a core basis. 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 the right ratio to think about?

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 under invest in the business.

Understood. Thanks for taking my questions.

The next question comes from Chris McGratty of KBW. Please go ahead.

Hey, good morning. Thanks for the question. Given the strong loan growth that's recurring, your recurring credit numbers look great. You mentioned that 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 start to have to build it given the mix of the growth that's current? Thanks.

Yes, because of the low level of charge-offs and because of the reduce kind of migration into adversely classified loan grades, less substandard loans our past ways. I think that the allowance is really a calculation based largely on that added with our qualitative of what is the unknown future kind of potential loss that is in 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 the credit trends continue to be benign, you will see the same thing because of the growth will continue to add to the reserve. If that doesn't happen, I think then there are other drivers I think that we need to look at. But at this rate that we're out of this coverage, that's kind of a level that I'm comfortable with Chris.

Okay, that's helpful. Thanks so much. And maybe on the margin, if I could real quick, I think if I look at core loan yield there for about 5 basis points sequentially after the hike. I think there's a couple basis points lower than maybe after the first few hikes. I'm wondering, 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? Thanks.

Yes, I think that is a competition and that is reflected in the yield. Also in our prepared remarks, we have mentioned that there were less – included net interest income, there were less kind of interest recoveries than few payment penalties. And so that made it impact in the quarter, especially quarter-over-quarter, probably about $3 million quarter-over-quarter 4 basis points for 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.

Great, thanks for taking the question.

The next question comes from Matthew Clark of Piper Jaffray. Please go ahead.

Hey, good morning. Just on the adjusted efficiency ratio one more time, given the outlook particularly here in the upcoming quarter around even slower loan growth and in the expense control, you expect to have. I mean there's no – you did below 40% this quarter that 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 that makes sense to you?

Said a statement or question?

Well, I will say that. As I stated earlier, whatever the number comes up to be is what it is, not something we can determine. Like I said, it’s a pluck-in numbers. We definitely will continue to be focused and to bring a new customers and taking care of customers that will be and then they will ending up with whatever the loan growth is and fee income, we would expect that is most likely is 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 is not we all like we can 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 looks like they remain a little elevated here in the third quarter. I assume there should be some release in that line item as we look out possibly in the fourth quarter, if not next year just with some of this BSA relief coming, is that fair?

With BSA consulting expense, clearly, we will trail off. I mean that’s the given. We have came a long way and then we have started of business as usual, about a quarter or two earlier than expected. And then so it's going really well, but we are starting working on other – on the entire enterprise risk management. There are plenty of others areas that we can worked on and on. So quite frankly building future like in a consumer banking side, and we are looking at the opportunities that what can east west do in terms of creating deep 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 a 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 reinvesting to building even a more likely sustainable profitable future. So there are 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 to have specialized capability in particular segment of the bridge banking that we're working on. Like looking at the consumer customer base that we've been enjoying great possibility for many years in the past, but start looking at that. The needs are changing. There maybe 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. So we'll give you a lot more details when we start sharing maybe highlight in 2018, but at this point right now, everyone in the bank in the senior level are hunkered down, putting out 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, but obviously, as I mentioned also at 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 the lifting off 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 care of customers. Keep in mind, when you talked about expenses – consulting expenses to your efficiency ratio and all of that, we had spent substantial more money for the last two years, three years in the BSA area, but somehow we still got record earnings year-in and year-out. So that's why we know as I said earlier that I don't get to worry about efficiency ratio because there's just one factor there. We obviously at the end of 2014 when we recognize 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 supposed to do. We are here to 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 the kind of money to take care of a regulatory challenge. We need to figure out and find way to make some money and work harder. And then collectively the entire organization, all the associations step up, they all work harder to make sure that we find enough revenue to offset against the 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 a record earnings this year.

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

Hi, thanks. So another follow-up on expenses. So coming at it a different way looking out 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 NNI to the loan book or whether it's non-interest 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 that we have so much discussion expenses, I guess let me just see how I can better answer. Well, I've been involved for the bank for 26 years. So from 1991 to 2007 and except 1996 that one-year that we did not have record earnings. The reason we didn't have record earnings 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 had to pay for all the losses by all the other S&L. So 1996 we got a one-time big save assessment. So that one-time assessment took our record earnings down our consecutive record earnings down that 1996, even though we made money, but went down. So from 1991 through 1995 we have record earnings every year, it went down 1996 to reasonable earnings. And then 1997 we pick up record earnings all the way through 2007. And then with 2008 for the first time in history of East West Bank we lost money. We made money in 2009, not record earnings though. 2010 to 2016 record earnings every year. So is that likely that we will have something 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 Bank 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, borrowing any kind of disasters thing 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, it's that can really project any exact economic outcome that would be happening. But one thing we can count that we have management here is that on a day-to-day watching our shop and do what's I call what's right. And so I'm not here 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 things, and but it’s always going to rational. It's now 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, may be at one quarter to two quarters at a time, but in time, it always worked out good. And so far, that's what we've been doing.

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

So at this point, if you look at where we are today, we have a 19% in organic loan growth annualized. It's really hard to beat. I mean, of course, I'm not expecting that to be quarter-to-quarter basis, I mean to the growth basis. That’s even if you talk about as Greg just mentioned about this low double-digit loan growth is still relatively speaking better than both of the financial institutions in the country. So I'm sitting here and said why would I want to do acquisition if things are going like the way it is right now. So our opposition is really now but I would do acquisition if someone come in and say that we love East West so much. You can buy any and less than two times book and then you have all these are ability to consolidate results, et cetera, of course, I would it, right? So again relative it's like rational management, making rational decisions. If you look at back in the early 2000, we basically made one acquisition a year for many years and every one of them, where extremely attractive price. And that's what we did because despite the fact at the time we have strong loan growth and strong organic going, we bought them anyway because they’re willing to search was at the very reasonable price plus we have a great opportunity to consolidate the cost out. So when that opportunity comes, love to do it. But if we look at current landscape, if we don't find anything that's why we have to be independently capable, which is long as we can have the ordering long growth long as we continue to go out to the ability to earn the money the capability. One product, one additional team at a time, we will be able to get ourselves to sustained the just kind of goal pattern and then with and without M&A, we’re okay. So that’s our strategy. I could rational strategy, not that we will be averted to making acquisitions, once we get – good in based on it was rationally better for us.

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

Hey, good morning guys.

Good morning Dave.

Not to beat a dead horse here, but on the expense side, I think the efficiency range you talk about is getting a lot of question because the mid 40s part of that, just imply the much faster expense growth rate than you've seen this year. I know you're talking about timing, the spending it seems appropriate and reasonable and that will make sense. I'm just thinking big picture here is that mid 40s level really just a super conservative level and you're thinking generally to stay in the low 40s range going forward.

We're trying to figure out how to answer the question in 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, prophecies procedures, some of that is to support further growth in the business from a from a year 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 your first point, we’ll 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 try to make is that we believe over time that our revenue growth is going sufficient to support those investments in the way that we’ve been able to do that historically. I think we want to – can't make the third point which is we don't focus on the efficiency ratio, obviously if you revenue more than you grow expenses, it's going to have an impact on the efficiency ratio. But out 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 a point before, particularly as you make front office investments. In teams, something the revenue follows behind that. And the other good thing about that is that the revenue – the one thing the revenue is going to start to come use reduce the expenses there pretty fast, but sometime on the revenue producing side, you invest a little bit head 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 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. Thank you. And one other quick one on the 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 healthy level, but I was just wondering how high you expect that to trend and how you're thinking about the deposit group going forward?

Yes, like we guided, we'd make it the sort of the two 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 feel a little bit more cautious about the number for the fourth quarter. If 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 and continue this mix shift that the bank has been driving over the course of many, many quarters. And so we are 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 where we can find whatever loan growth we turn out to have in the fourth quarter.

The next question will come from Michael Young of SunTrust. Please go ahead.

Hey, thanks. 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 trend 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 businesses are doing well.

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

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

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 2017. So we're looking forward to talking with you again in January 2018. Thank you.

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