Earnings Call: Q3 2018

Oct 18, 2018

Good day, everyone, and welcome to the East West Bancorp third quarter 2018 financial results conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad, and to withdraw your question, please press star then two. 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 would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For a more detailed description of risk factors that could affect the company's operating results, please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 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 site website. During the Q&A, we ask that you limit your questions to two. I will now turn the call over to Dominic. Thank you, Julianna. Good morning, and thank you everyone for joining us for our call. I will begin our discussions with a 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 non-performing assets total $115 million or just 0.29% of total assets. Quarterly net charge-offs were 5 basis points 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 five-quarter range for ROA has been 1.35%-1.84%. For ROE has been 13%-17%, and tangible ROE has been 15.1%-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, an 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 am 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 and capabilities to be a value 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 need for our knowledge and services. The value add that East West brings to the table is greater than ever. Yes, at the macro level, tensions between the U.S. and China have led to a drop in Chinese direct foreign investment in the United States. However, at our current size, East West is still small enough and have plenty of rooms 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. 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 front line team, upgrading our systems, 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 year. Furthermore, over the last few years, we have continued to invest in technology and our product capabilities to meet customer expectations throughout the bank, including in our cash management products and capabilities. In early 2019, we will be introducing more digital capabilities on our deposit platforms for both commercial and consumer customers. We expect this enhancement will be instrumental in expanding our core deposit relationships in the coming years. Moving on to a discussion of this quarter's loans deposit growth on slide number 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 balance, 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 commitments increase in private equity sector, which drove growth in 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 multifamily 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 six, you can see that total deposits 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% three 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 spring and summer deposit campaigns. 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 seven, we have a slide that shows the summary income statement, a snapshot of the key items, including tax-related items. I'll skip the summary and dive right into the details on slide eight. 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 376 decreased by seven basis points, and excluding the impact of accretion, the adjusted net interest margin of 372 was down by four basis points from the previous quarter. The drivers of the seven 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 three basis point decrease due to a decline in ASC 310-30 discount accretion income and a one 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 two 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 earning assets during the quarter, which impacted the net interest margin by approximately two 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, the Fed funds rate did not increase until late in the third quarter, and the one-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 375 basis points. 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 an end-of-period basis, the biggest increase in our deposit costs was in the second quarter, and in the third quarter, this increase moderated. As of September 30th, the end-of-period cost of our total deposits was 0.83%, up by 11 basis points from 0.72% as of June 30th. For comparison, the quarter-over-quarter increase as of June 30th, 2018, was 19 basis points. Similarly, the end-of-period cost of interest-bearing deposits was 122 basis points as of September 30th, up 15 basis points from 107 basis points as of June 30th, which was up by 25 basis points from March 31st. Cycle to date, since the Federal Reserve 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 costs, 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 375 basis points. This implies, 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 non-interest income in the third quarter was $46.5 million, compared to $48 million in the prior quarter. Excluding the impact from gains on sale, total third quarter non-interest 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 non-interest expense was $180 million, and our adjusted non-interest expense, excluding amortization of tax credit investments 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 capabilities and improve our customer experience. Our third quarter 2018 pre-tax, pre-provision income of $238 million grew by 1% quarter over quarter, and our pre-tax, pre-provision profitability ratio was 2.44%. Year over year, our pre-tax, pre-provision income is up by 13%, and our pre-tax, pre-provision profitability has expanded by 12 basis points. In slide 11 of the presentation, we detail our 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. Non-performing 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. Non-performing 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 five basis points of average loans annualized. This compares to 11 basis points of average loans year to date in 2018 and nine 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 remain strong. Tangible equity per share of $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 payouts and organic balance sheet growth are supported through organic earnings generations. 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. 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 375. In terms of changes to our outlook, we are lowering our provision expense expectations to $60 million-$65 million for the full year, down from a range of $70 million-$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, Audrey. 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 capabilities, 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? Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. In an interest of time, we will limit each participant to two questions. Our first questioner today will be Ebrahim Poonawala with Bank of America Merrill Lynch. Please go ahead. Good morning, guys. Good morning. Good morning. Yeah, I guess first question, Dominic. You touched upon the sort of market share opportunities for the bank. It seems like you can grow loans at whatever rate you want to, depending on your appetite and if you find good sort of risk-adjusted returns. As we think about next year in terms of loan growth, can you talk about sort of the opportunity in terms of do you feel even better on the commercial, the C&I, and residential mortgage side to be able to sustain this level of growth? Well, for the residential mortgages, we have been, for several years now, consistently find ability to have a very nice, robust growth. 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. In addition to that, our team has gotten better and better internally, that the service level have got to the point that. The interesting thing about it is that it's been a few years now that we did not do any type of advertising or marketing on the single-fam 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'll find is that we have enough diversification there in different industry verticals that I think that maybe one quarter, like for example, this quarter, energy and entertainment step up. A couple of quarters ago, our entertainment sector was not doing as well. But they start coming back, and private equity capital call line was not as strong maybe a quarter ago, and now coming strong. So different quarters going to have different vertical that step up. But they kind of average out. But I still feel that we're going to have plenty of opportunities there. But more importantly is because of the current U.S.-China tariff situation. 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. From that angle, I would say that we are pretty confident that we should have a pretty nice growth opportunity in 2019 and beyond. That's helpful. I guess switching to capital, TCE 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 the dividend payout where you would look to get to? Are you okay just building capital for now, and given some of these late cycle concerns where you would rather have excess capital? No, as we stated before, at East West, we're always shareholders friendly, and we always have these discussion about dividends or even share buyback with our board. These are always discussion that we, 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 either recession or financial crisis time. If you look back, I recall in 1991, we make a very good deal through the RTC. In 1992, same thing. 2009, our takeover of United Commercial Bank. Those are the times that really are transformational sort of opportunity for East West Bank. My view is that we never wanted to just look in a very short time horizon type of earning per share increase for marginal differences. The reason I can say that is because we're having some very strong return of equity, return of assets, and our profitability is really high. Our net interest income continue to grow, 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 just in case, I don't wish for any sort of slowdown economy or a recession, anything like that. But in case something happens, we will be in a much better position to strike than where we are today when everything seems to price at the top level. With that regard, I just give you some, when we have discussion with the board, normally the discussion evolve about these kind of opportunity cost, the cost benefit and et cetera. That is how we come to conclusion. But there is no question in our mind when we feel that, if the profitability, well, obviously continue to stay so strong, and if there is any reason that we feel that we may not be able to fully utilize the capitals in the next foreseeable future, then we obviously both on increasing dividends. And even if the stock price looks very attractive, buyback, there is all different options will be considered. However, at this stage right now, I would 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 two decades has been extraordinary beneficial for the long-term growth of East West Bank. And 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. Our next questioner today will be Jared Shaw with Wells Fargo Securities. Please go ahead with your question. Hi, good morning. Good morning, Jared. On the CD promotions that you had run, I guess first, is that done now? 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. A few weeks ago that we completed the campaign. This was a very good campaign. Not only we took care of many of the existing customers, and we used 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. With these new 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. The branches are very excited that they were given this opportunities to bring in additional customers. Are you looking to try to, at this point in the rate cycle, moderate asset sensitivity? Bringing in these CDs extends obviously the duration of 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? Yeah, I think that's a great question, Jared. I don't think that the CD campaigns is really a deliberate strategy to moderate our asset sensitivity. We are still quite asset sensitive from the low side. We have $11 billion of our loans are tied to LIBOR, another $11 billion tied to prime. A lot of that reprices. Given where the yield curve is, I think this is still the right strategy for us. The CD campaign, as Dominic alluded to, we wanted to make sure that our retail branches reinvigorated. This is also with the rising Fed funds rate, where the market is. We wanted to make sure, quite frankly, that they had enough ability to go out there and compete with other banks out there. Our next questioner today will be Aaron Deer with Sandler O'Neill & Partners. Please go ahead. Hi. Good morning, everyone. Good morning, Aaron. 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. If that trend continues, notwithstanding some of your current liquidity that you've 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? Yeah. 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. Also, as we 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'll continue to do our analysis and give an updated, more specific feedback on what we think about 2019 with the earnings call in January. 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 we do expect year over year, the net interest margin to increase. Okay, very good. Thank you. I'm just curious, you walked through some of the different specialty categories within the C&I book. What amount of commercial loans currently are related directly to trade finance? Trade finance loans, if you look at our C&I loans, it is roughly from an outstanding balance perspective, it is about $1.7 billion related to wholesale trade. Our next questioner today will be Chris McGratty with KBW. Please go ahead. Hi. Good morning. Thanks for the question. Maybe just a question on credit spreads. Any changes that you have noticed in credit spreads year to date, maybe from the give back of some of the tax benefit? Any kind of commentary on credit spreads relative maybe where they were six to nine months ago? Yeah. I do not know if we have seen substantial changes from six to nine months ago. Certainly in certain asset class categories such as CRE, we have talked about that as far as where prices are and also kind of a function of where rates are. We want to be careful about growing that at a lower price. I do not know if substantially we have seen tightening, let us 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, that's the full 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. Our next questioner today will be Matthew Clark with Piper Jaffray. Please go ahead. Hey, good morning. Morning. Just the first one on potential relief 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 an estimate, we think the run rate for the year will be probably roughly $12 million or so. Okay. On the adjusted efficiency ratio, I guess what are your thoughts on the sustainability of that 40%, given your growth prospects and expectation for NIM expansion next year? I think the math on that will just kind of flush out, Matthew. Given where we're at right now, we expect efficiency ratio to be roughly the same. Our next questioner today will be Michael Young with SunTrust. Please go ahead. Hey, good morning. Good morning. I 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 I think that we've been investing for the last few years. The first category is actually just human resources. For the last four to five years, we have continued to bring in experienced hires and to complement with our homegrown legacy executives and managers and officers and so forth. We have continued to do that in the last few years. I would expect 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. We also have expenses in terms of building up our internal capability and infrastructure from enterprise risk management area, from technology area. I think particularly in the digital technology area, is an area that I expected that both consumer digital and commercial digital platform that we are building, we will still have expenses, obviously, or I should say investments that we need to put in to continue that development. Because 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 endeavors, because, in the long run, this will reap substantial benefit for East West Bank. From the enterprise risk management, and then the internal risk oversight type of build-out, I think that we are in pretty good shape. The additional costs are going forward. I think the additional expenses growth should be substantially less than what we have built for the last few years. In that standpoint, I would say all in all, what I'm looking at right now is that the technology side, the digital technology side, you probably see that similar kind of 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. 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. 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 so I can- Well, you've commented on cap rates being low for commercial real estate and just prices increasing so much through the cycle that you guys wanted to decelerate growth there. Single-family, I think, has experienced some similar trends in pricing, et cetera. Just curious why you're so comfortable with that portfolio. Well, I think that it's a little bit different in that. On the CRE side, 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 on competitive pricing with everybody else throughout the country. When it comes to single-family mortgages, our primary production has been within the Chinese American market. 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. From a credit risk standpoint, obviously, it's not much of a concern at all. Then we have 40 some odd years of history doing the same thing and 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 that single-family mortgage will be able to grow like the kind of volume that we had. I've been talking about it the last few years, and I was wrong every year. Just like my prediction of interest rate will eventually rise several years ago, and I was wrong on that, too. But eventually it may become true. But I would say this, is that what I found why I was wrong the last few years is that we simply are not that big. 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 if 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 reliable of closing these mortgages on a timely manner. I think that sort of goodwill and the brand, with all the referrals that are coming to us, allow us continue to take on 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 way 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. Our next questioner today will be Lana Chan with BMO Capital Markets. Please go ahead. Thanks. Good morning. One question around deposit growth. Your loan-to-deposit ratio is getting towards the upper end of the range that I think you said that you were comfortable with, that 93%. Should we expect another CD campaign shortly, or is it not likely until next year? Did you say before that the fourth quarter margin assumption assumes that the deposit costs increase moderate? Lana, that's correct. This is Irene. We do expect that the deposit costs will moderate. The increase in deposit costs, excuse me, will moderate in the fourth quarter. In the prepared remarks, we talked about point over point what the cost of deposits were. After the end of September, 83 basis points. That was up 11 basis points from 72 as of June 30. If you look at that as well, the increase point to point has decreased, if that makes sense. Okay. About this CD need for funding, is that more likely next year or we- No plans for the fourth quarter. Okay. Also, could you give the rates on the yields on the resi mortgage now? Just looking at that relative to the core loan yield of 497. Is it still accretive? Yeah. So for the resi mortgages that we are rate sheet right now for 5 year, no points are 5.25%. One other thing I will maybe highlight is we also introduced a few months ago, reintroduce a 30-year fixed mortgage product, given kind of where rates are and the needs of our customers. So the rates on that for the 30-year fixed is 5.75%. The next questioner today will be Dave Rochester with Deutsche Bank. Please go ahead. Hey, good morning, guys. Good morning. 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 shrinking next year, then you have $12 million in savings or so from the FDIC surcharge rolling off. It just seems like expense growth could actually come in decently next year. Are you thinking that maybe the mid-single digit pace for that is more appropriate at this point for next year? We will definitely give you a more narrow band guidance in January, because we're working on the budget. But I would say that right now, based on what we've seen, your assumption looks very, very reasonable. Yep. Okay. 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 seem fairly low. 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? Yeah, that's a great question. We have continued to kind of increase the duration of our securities book. 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 duration through the quarter. We bought more securities with average duration of five plus, and some of the loans or, excuse me, securities that we sold or matured were lower duration. That's something gradually we do expect to kind of change. As I mentioned earlier, we are also originating 30-year fixed loans as well, given kind of where rates are and just our comfort with our asset sensitivity. Our next questioner today will be Gary Tenner with D.A. Davidson. Please go ahead. Thanks. Good morning. Good morning, Gary. Hey, I think you had highlighted the trade finance 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, many of our customers actually are. In fact, they're actively looking at the potential trade. Well, some of them, a few of them already got hit with 10%, but many of them are preparing for the potential 25% come January of 2019. We all have to prepare for the worst-case scenario. That's why our team actually used this opportunity to go on and do these clients call. Because sometimes, without these kind of challenges, bankers knocking on doors and calling on customers, sometimes it can be a little bit of a distraction to our customers focusing on running the day-to-day business. But in today's environment, our customers are very interested to welcome us visiting, and then allow us to have the opportunity to take a deep dive in understanding our client situation better, and then we can share ideas. We have many examples. Recently, we have a few clients that actually are exporting goods from China to U.S., and they have been working closely with the retailers in U.S., and the compromise is that our clients in China is going to take some reduction in their margin, and the U.S. retailer would also do the same thing. The difference is going to go to the consumer. That is the game plan, is that in case the worst-case scenario, that 25% tariff is going to come in, and they're going to just go with that plan. You know what? We looked at it with the Chinese government providing tax relief for these type of exporters, and then despite the fact that they're reducing the margin a bit, it's not like that they're taking on the entire 25% on their own, because the U.S. retailer take on some, the U.S. consumer would have to take on some, and they would take on some, and then they got offset by some of these tax relief from the Chinese government. Net-net, it's not that big of a deal. But the difference is that we at East West Bank spend the time and understand that and work with these different scenario, do the stress test. We feel that the specific customers actually can grow volume despite the margin decrease, but it can use volume to offset the margin reduction and come up with even more profitability. Customer 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 hear something about, well, anything U.S.-China related, they just wanted to back off and de-risk themselves. For those customers or for those business that have the banks who don't understand them, that would de-risk 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 one or two specific products that can easily outsource to Thailand, Indonesia, Malaysia, and then they went ahead and start doing that outsource in another regions. For those customers who can easily outsource, they did outsource. For those actually, the supply chain is too complicated, the infrastructure is too sophisticated that they cannot move around. They are just going to have to just hunker down and then do compromise with the U.S. retailers and so forth. Then obviously, we have other clients who set up their manufacturing base in U.S., and then we are helping them. For those who said that, "You know what? We do not want to deal with this uncertainty of tariffs. We better make sure that we set up shop in U.S." Then we are doing the financing for the equipment they put into their facilities, and we are financing some of them for the real estates that they acquire in U.S. Step by step, we just think that different kind of challenges, different kind of opportunities, and that is what we are working on right now. Great. Thank you, Dominic. Our next questioner today will be David Chiaverini with Wedbush Securities. Please go ahead. Hi. Thanks. I had a follow-up on the CD campaigns. Have you always done 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 CD campaigns in the past, but we haven't done it for years. Obviously, most banks haven't done much CD campaign for years because when interest rate, Fed funds rate at 25 basis point, and customers really don't care one way or the other. You offer them like a 55 basis point CD rate is somewhat insulting. We just never had to do so much in the last few years until rate have risen up to the level that make it meaningful to go back to do the CD campaign. But 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 Moon Festival CD campaign. Summer, spring, whatever. We've done it all for the last 20 some odd years. I've seen it all. This year, we just I think, thank goodness, that I think the branches were very excited. They said, "Wow, finally, we got something exciting to do." Because, quite frankly, for the last two years, because of the low rate environment, the branch enjoyed the fact that they were out there bringing in DDA, small business, commercial deposit, et cetera. And a part of their heart on. 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 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. I looked 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 will basically manage the business in the most appropriate way, depending on the circumstances next year. Okay, thanks for that. Then separately, more and more banks are getting into the capital call line business. I was wondering, are you seeing spreads narrow on capital call lines? Not really, not in the capital call line. I would say that you are right. There are a lot more banks now, just the last year or 2, jumped in. We've been in this business now for 5, 6 years. So we have clients that came to us 5, 6 years ago when there were very few banks were doing this business. So we'll continue to have great relationship with these clients. Then because of our services level has been very satisfactory to them. Then so we still have our share of business. So I would say that maybe in time, because everybody jumping in, joining like come lately, that may be some pressure down the road. We at East West Bank haven't seen much lately. 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 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.