Earnings Call: Q3 2017

Oct 19, 2017

Good morning, and welcome to the East West Bancorp third quarter 2017 earnings 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 touchtone phone. To withdraw your question, please press star then two. 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'd like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For more detailed description of risks 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 investor relations site. As a reminder, today's call is being recorded and will also be available in replay format on our investor relations website. We will have question and answer session after the prepared remarks, and we ask that you limit your questions to two and then step back into the queue. Thank you. I will now turn the call over to Dominic. Thank you, Juliana. 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 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% annualized, and net interest income increased by 5% quarter-over-quarter to a record $303 million. I believe that our solid growth quarter after quarter, year after year, is a testament to the value proposition that we provide for our customers as the bridge between the East and the West, and a reflection of the underlying strength of the geographic markets we operate in. Furthermore, asset quality remains excellent. Quarter-over-quarter, non-performing assets declined by 12% to 32 basis points of total assets, and our annualized net charge-off ratio was 6 basis points in the third quarter. With the recent hurricanes in Texas and in the Southeast and wildfires in California, our employees are safe and our Houston branch facilities 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 4. As shown in slide 4, our five quarter return on assets ranges have been 127 to 149 basis points. The return on equity range has been 12.9%-14.9%, and the return on tangible equity range has been 15.3%-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, at a measured pace, we are building an ever stronger bank to support our long-term operating philosophy of delivering sustainable and attractive profitability. 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. 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. 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 longtime customers, including owner-occupied facilities linked to our traditional clients, as well as a slower pace of payoffs compared to Q2. We maintained our discipline in both credit quality and pricing during the quarter. I would also like to point out that average loan growth quarter-over-quarter was 12% annualized, reflecting particularly strong performance towards the end of the quarter. Turning to slide 6, our deposits reached a record $31.3 billion as of September 30th, 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 runoff in money market and time deposits during the quarter. Our loan-to-deposit ratio at quarter end was 91%. I would note that quarter-over-quarter growth in average deposit balances was 11% annualized, fully funding our linked quarter increase in average loan balances. We continue to invest methodically in infrastructure, technology, and product capabilities to gain market share and to attract new commercial and retail customers, and our performance during the quarter reflected this focus. Turning to slide 7, total fees and other operating income for Q3, excluding net gains on the sale of loans, securities, and fixed assets, was $41 million, down $1.2 million or 3% linked quarter. Other fees and operating income decreased linked quarter, in part because of a decline in insurance commissions due to the sale of the insurance brokerage business. Excluding CVA and mark-to-market changes associated with currency hedges, customer-related fee income increased by 4% linked quarter and 10% year-over-year, reflecting strong performance from our interest rate swap business, partially offset by a decline in FX after a strong second quarter. I will now turn the call over to Irene for more specifics on the quarter and on the outlook. Thanks, Greg. I'll start with the summary income statement on slide 8. Largely as a result of loan growth, net interest income, excluding accretion, increased by $15 million or 5% to $299 million for the third quarter. ASC 310-30 discount accretion income decreased by $2 million to $4.5 million in the third quarter for total net interest income of $303 million, equivalent to linked quarter growth of also 5%. As Greg detailed out the fee income for the quarter, I'll skip down to non-interest expense section of the income statement. Total non-interest expense declined by 3% linked quarter and excluding tax credit and other investment amortization and the amortization of core deposit intangibles. Adjusted non-interest expense declined slightly from the second quarter by less than half a percent. The provision for credit losses in the third quarter was $13 million compared to $11 million in the second quarter and within the range of our expectations. Finally, the effective tax rate for the third quarter was 24.3%, in line with the full year run rate of 25%. Moving on to slides nine, ten, and eleven of the presentation for a closer look at our earnings drivers. The third quarter increase in net interest income largely reflected increased revenue from loan growth in the period, as well as recent increases in interest rates. Excluding the impact from accretion, our adjusted net interest margin of 3.46% was up five basis points one quarter. The remaining ASC 310-30 discount accretion on our purchase credit impaired loans was $39 million as of September 30th, 2017. Compared to recent quarters, in the third quarter, we experienced a lower level of non-accrual interest income recoveries, prepayment penalties, and other fees in interest income, which impacted loan yields during the quarter. As Greg mentioned, we saw a lower than typical level of early loan payoffs this quarter. The yields on our securities book expanded by 11 basis points for the quarter and yielded an average rate of 1.99%, reflecting higher interest rates. Our cost of deposits increased by four basis points, similar to the pace of increase for the second quarter of 2017. Turning to slide 10, our adjusted efficiency ratio dipped below 40% and was 39.8% in the third quarter, compared to 41.3% last quarter. For the last five quarters, adjusted non-interest expense, excluding the impact of amortization of tax credit and other investments in core deposit intangibles, has ranged from $136 million and $140 million, resulting in efficiency ratio ranging from 40%-45%. The combination of our net interest income growth and improved efficiency drove expansion in 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 five basis points linked quarter. Over the past five quarters, our pre-tax, pre-provision profitability has ranged from 2.03%-2.32%. In slide 11 of the presentation, we detail our critical asset quality metrics. Our allowance for loan losses totaled $286 million as of September 30th, 2017, or 1% of loans held for investment, compared to $276 million, or 1.02% of loans held for investment as of June 30th, 2017. The growth in the allowance for loan losses was largely due to an increase in the general reserve related to new loan growth during the quarter. Non-performing assets decreased by $16 million to $117 million, or 32 basis points of total assets as of September 30th, 2017, compared to 37 basis points as of June 30th, 2017. The decrease in non-performing loans was largely due to the resolution or payoff of smaller loans. Our net charge-offs this quarter remained low at $3.8 million, or six basis points annualized of average loans. Dominic mentioned the ongoing assessment we are conducting regarding the impact from recent natural disasters. I would like to add that the allowance for loan losses as of 9/30 also incorporated our best assumptions and estimates of the potential impact to the portfolio at this time. Moving on to capital ratios on slide 12. East West capital ratios are strong. Tangible equity per share of $22.71 as of September 30, 2017, grew 4% linked quarter and grew by 12% since the beginning of the year. Our capital ratios increased by 32 to 65 basis points year to date. Current capital levels are sufficient to support continued organic growth in our view. East West Bancorp's Board of Directors have declared third quarter 2017 dividends 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, 2017. Turning to slide 13 of the presentation for an outline of our outlook. Today, we reaffirm our outlook for the full year 2017, generally unchanged from what we presented last quarter. For the full year, we continue to expect loan growth in the low double digits. We do anticipate a slower pace of loan growth in the fourth quarter than the above-average growth we experienced in the third quarter. We have tightened our anticipated full-year net interest margin range, excluding accretion, to 340 to 345 basis points from 335 to 345 basis points previously. Our outlook incorporates the forward Fed Funds rate curve, and as such, we expect one more Fed Funds rate increase in December. That late in the quarter, however, we do not expect significant impact to the fourth quarter net interest margin. On the tax rate, we expect the full year effective tax rate will be 25% and anticipate the fourth quarter amortization of tax credit and other investments to be approximately $23 million. We will discuss our outlook for 2018 next quarter during our January earnings conference call. With that, I will 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. Now I will just open the call for questions. 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. At this time, we will pause momentarily to assemble our roster. The first question will come from Aaron Deer of Sandler O'Neill. Please go ahead. Hi, good morning, everyone. Morning, Aaron. I was wondering first, maybe on the question of expenses. Dominic, you talked a bit about some of the investments that you're making in terms of infrastructure, risk management, product capabilities, and such. As you look out over the coming year, and I realize you guys aren't giving 2018 guidance just yet, but is there a sense of where you expect your efficiency ratio to go? Or is there another metric that we should be thinking about in terms of what kind of investment level you're anticipating given the outlook? Well, 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, when we build out a sustainable, long-term franchise, we will need to continue to putting some upgrades here and there. So that's a given. As an organization, we actually never really measure efficiency ratio as the number that we put out because everybody else seems to be providing that information, so we're more than happy to share that. But as an organization, we run our business by looking at some specific primary drivers. You look at efficiency ratio, it's just a matter of a numerator divided by a denominator, and the numerators are the revenues, and then denominator being the expenses. From that standpoint, we looked at loan origination, we look at non-interest fee income. These are the drivers that are very important to us that are core related to our customers. Obviously, we look at core deposits, how much new customer we bring in, how much core deposit we bring in, and what kind of cost of funds are we getting, loan yield, loan origination, et cetera. Then, of course, we manage our expense very responsibly, and we've been doing that ever since we went public in 1999. Actually, I should say that before we even went public as a private company, we had the same philosophy about how we run our business. So those things and all these disciplines remain the same, and we continue to run our business in the same direction. Whatever that spelled out, it is what it is. Now, one would notice that this quarter is like a drop below 40. Usually, we hang around at kind of low 40, mid 40 kind of range. This quarter dropped to below 40, and I think that has a lot to do with the strong loan origination that we have. Obviously, the combination of the margin expansion, the loan growth, deposit growth, and we still have strong fee incomes, et cetera. While the expenses have actually continued to sort of support our investment, but we actually are having a little bit dip of the efficiency ratio. But the fact is, I look at it as that our position is that we're going to continue to drive loan growth as long as these are quality loans. But not just to grow for the growth's sake, but as long as they're quality loans, these are quality customers. These are customers that are relevant and strategic to our overall core strategy, and we're going to do more of that, and we'll continue to build our fee income. In order to continue to build our fee income, we're going to have to make the right investment, both in talent, in technology, and also in risk management. Step by step, we're 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, it will just give us a little bit more opportunity to take a stronger move in terms of making investments. However, if for some reason in 2018 and 2019 and beyond that the macroeconomy slow down dramatically, which affect the entire banking industry, we obviously will immediately start managing expenses accordingly. We work every day, and every single day, we're watching these sort of key indicators to make sure that we're doing the right thing. In that respect, I would say that you don't have to put too much focus on the efficiency ratio. We're just going to keep managing all the primary drivers and get it somewhere in the right place that in general to make everybody pleased. I guess it's my long way of answering your question. I don't know if I answered your question or not. If not, maybe, Greg and Irene can chime in. Thanks, Dominic. Irene, I was curious on the tax front, as you look out at your tax planning strategies for 2018, I've heard there's 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 that you've been making over the past year or 2, or is that likely to drop down to something lower? Yeah. 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 transactions is going to be reduced over the years. So with that and also the changes that potentially can happen with the current administration, that is something that we're looking at carefully. 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 ones. For 2018, we are kind of assembling and evaluating what we think we are going to be making investments in and the timing of that. So, I'll share that probably in January when we give our guidance, we can give more updates, but generally speaking, I do think that those investments will come down. 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 on, just on the tax rate, I see your guidance is for, I guess, the 25%, but your year-to-date's also 25%, and I'm just trying to think of how you account for the first quarter, the much lower first quarter tax rate. Do you just exclude the stock option piece in there such that obviously fourth quarter should be 25% as well to get to your full year number? Yeah. So the 25% effective tax rate is for the full year. There are some discrete items each quarter that impact it, as you mentioned in the first quarter with the stock. Third quarter also, we have some discrete items. So in total, including those, we're looking at the 25%. Got you. Understood. Okay. Maybe I could follow up offline, because I think if I put in 25%, the full year average of all four quarters is considerably less than 25, given the 18% first quarter, if that makes sense. Yeah. We can follow up with you, Ken. Okay. Totally fine. Then, just the comments that you guys made on commercial real estate, the lower payoffs that you saw in the quarter. Oddly enough, this morning we heard other comments from another bank talking about much higher levels of payoffs in third quarter and the expectation that that continues. Can you just talk a little bit about why your CRE portfolio might be seeing very different trends from other banks? Thanks. Yeah. I think first of all, probably a lot of it is idiosyncratic in the sense that it fluctuates and what happens on September 29 or October 3 is a little bit hard to predict. I think when we talked about lower payoffs, that was really related to second quarter. If you went back to first quarter, where I think we again said we had lower payoffs than typically the third quarter was more in line with the first than with the second. The only other thing I would say is when you look at our commercial real estate business, it continues to be, as I said in the prepared remarks, a lot of our activity is owner-occupied. These are business owners that we may bank or likely bank more broadly, 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 property. So some of those differences potentially could contribute to how different banks saw the quarter. All right, great. That's helpful. Thank you very much. The next question comes from Jared Shaw of Wells Fargo Securities. Please go ahead. Hi. Good morning. Thanks. Following up on the expense side, maybe coming at it a little different way. Some of the investments that you highlighted in infrastructure and enterprise risk management and new hires, has that already started or is that something that will be incrementally new investment processes that we should expect as we go into fourth quarter but also go into 2018? Well, no. We've been investing all along. As Dominic Ng said, it's been a consistent philosophy of East West Bank to make the investments that are necessary. I think as we've said, there were elevated investments around the BSA/AML program. Our approach is to not fully go back, but to keep reinvesting some of the allocated spend we had for BSA/AML into some of these other areas to strengthen infrastructure, invest in new technology. It's an ongoing program. Where we invest 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 is, as Dominic Ng 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. Then there's investment in front office, hiring new teams, expanding further into some of the geographies where we are already located. Those expenses are easy to dial up and down relative to revenue. I think you have to think about it in both of those categories. I think the other thing that's important to note is we're not particularly managing to an expense number. I think our guidance for this year is in the low single digits. But it's going to go where it's going to go based on the investments we feel like we need to make in the business. As Dominic Ng noted, we have the ability to calibrate those relative to revenue. We've been fortunate to be able to find ways of growing loans and growing other income that's allowed us to fund the investments that we were just talking about. Okay, great. Thanks. On the loan side, the first point is, owner-occupied CRE, do you still classify that as CRE or C&I? It sounds like it may be in the CRE bucket. Yeah. It's in the CRE bucket if real estate is our source of repayment. Okay. When you look at the loan growth year to date, you're at something like 11.5%, and you talked about fourth quarter maybe being a little slower than third quarter. Where are you seeing maybe that incremental weakness on growth as we go into the end of the year? Otherwise, it seems pretty strong overall. Yeah. I think we were 15% year-over-year through the first three quarters. I think is the number. If we look at our guidances in the low double digits for the year. I think it's consistent. I think if you look at the fourth quarter, we would say that we'll probably see, based on where the pipeline stands, better growth in C&I than in CRE. 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. I just want to sort of touch upon deposit pricing competition and just get your thoughts in terms of, we've seen some runoff in money market and time deposits, and we've seen those rates go up. Can you talk about in terms of, one, are you letting go some of the more rate-sensitive clients, and that's why we are seeing sort of the movement in the balances? And whether you're running any promotional rates to keep certain accounts. 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. When we focused on those core deposit categories, we are leaning in, we are being competitive where we need to be and proactive where we need to be in order to keep those deposit accounts with those customers. 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, given the ability that we had during the quarter to grow the core deposits, we've been comfortable letting some of those run off and not competing as much on price there, where it's obviously more of a transaction. Understood. That's helpful. I think to make it simple, we really haven't done any promotions. We really have not really work on to just make a big adjustment in rates and anything like that. So we give flexibility to our managers to provide them the authority to do some variance to match some competition, and that's about it. Fortunately for us that we have very strong relationship to many of our core customers. Then we also continue to grow business. When you grow business, you get the operating accounts. You get some of these core deposits that comes with it. You look at the trend of this quarter, it's not that much different than in the past. We always have runoff of CDs for years, then with the growth of the core. Because that's what we focus on. I would expect that we will continue to be in this kind of direction, as long as we able to grow our deposit overall. As Greg mentioned earlier, the average deposit balance growth during this last quarter was still pretty attractive and clearly on pace to match the loan origination growth. So we feel like that we're in good shape. But we obviously will continue to keep watching it, managing on a day-to-day basis, then react or respond to it accordingly going forward. Understood. Switching back, if I could follow up on expenses. Appreciate all the color that you gave, and I recognize that you've been investing in across the board in infrastructure over the last few years. Just to frame it, and I realize you'll give 2018 guidance in January, 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? Well, we'll give specific guidance in January, but as I said, we're going to make the investments we need to make in the business. 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. 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 occurring, your credit numbers look great. I'm interested if you could speak to the level of the reserve going forward, given that it's 1%. How much lower can it go? Or when do you 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 reduced kind of migration into adversely classified loan grades, less substandard, more loans are passed grades. I think that the allowance is really a calculation based largely on that and added with our qualitative factors of what is the unknown future kind of potential loss that isn't within the historic losses. 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. With that said, all things being equal, I think the trends that you see right now, if credit trends continue to be benign, you'll see the same thing. Because of the growth, we'll continue to add to the reserve. If that doesn't happen, I think then there are other drivers or things that we need to look at. But at this rate that we're at this coverage, that's kind of a level that I'm comfortable with, Chris. Okay. That's helpful. Thanks so much. Maybe on the margin, if I could real quick. I think if you look at core loan yields, they're up about 5 basis points sequentially after the hike. I think it's a couple basis points lower than maybe after the first few hikes. I'm wondering, number one, is that a correct statement? If it is, have you noticed kind of increased competition that's driving a little bit thinner improvement in the core loan yields? Thanks. Yeah, I think there is a little bit competition, and that is reflected in the yield. Also in our prepared remarks, we had mentioned that there were less non-accrual interest income. There were less kind of interest recoveries and prepayment penalties. So that made an impact in the quarter, especially quarter-over-quarter, probably about $3 million, quarter-over-quarter, 4 basis points was the impact. Yeah, the other thing I would add is that we were probably, as we noted, the CRE growth during the quarter was elevated from expectations. 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 the expense control you expect to have, you dip below 40% this quarter, but it doesn't seem like there's any reason why you shouldn't dip further below 40% here in the fourth. Obviously, the wild card is next year, and I guess we'll learn more in January, but just wanted to underscore that and ask if that makes sense to you. Is that a statement or a question? Well, I will say that, as I stated earlier, whatever the number comes up to be is what it is. It's not something we can determine. It's like I said, it's a plucking numbers from. We definitely will continue to be focused and to bring in new customers and taking care of our customers. It will end up with whatever the loan growth is. Fee income, we will expect that it's most likely is going to be similar to what we have. Expenses, at this point, even with that strong desire, we continue to build up a much stronger and better franchise. There's only so much we can spend because this is just an organization. It's not like we could get out of control very quickly in a quarter. I would expect that whatever number comes out, it is not going to be anything surprising one way or the other. Yeah. Okay, great. Then just around consulting expenses, looked like they remain a little elevated here in the third quarter. I assume there should be some relief in that line item as we look out possibly in the fourth quarter, if not next year, just with some of this BSA relief coming. Is that fair? With the BSA consulting expense, clearly, we will trail off. That is a given. We have came a long way, and then we have started business as usual about a quarter 2 or earlier than expected. It is going really well. But we are starting working on the entire enterprise risk management. There are plenty other areas that we can work on and also, quite frankly, building future, like in the consumer banking side. We are looking at the opportunities of what can East West do in terms of creating unique value proposition for our customer base by 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 not for regulatory purpose, but really for revenue-driven purpose and for Adapting to customer needs in the long-term future basis, and then also for sustaining a valuable franchise in the long run basis, and we are looking at these areas, too. Obviously, our position again is that when we have strong earnings growth, we do not just sit there and not using these opportunities to extract some of these excess profitability into reinvesting to building even a more likely sustainable, profitable future. There are things that we look at, as Greg talked about earlier. Part of it is to continue to build a strong foundation like risk management related to even cybersecurity and things like that. The other part will be how do we get all these sustainable year in, year out, quarter after quarter revenue growths that we have been achieving for the last many years? We've done that because we're constantly investing in the future by sometimes bringing a new team that has specialized capability in particular segment of the bridge banking that we're working on, or looking at the consumer customer base that we've been enjoying great profitability for many years in the past, but start looking at that the needs are changing. There may be the opportunity for us to start looking at something unique from East West from a digital banking point of view. Those are kind of things that we are exploring. I will give you a lot more details when we start sharing maybe our highlights in 2018. But at this point right now, everyone in the bank in the senior level are hunkered down putting our strategic plan together. 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 their lifting of the agreement. So we feel very comfortable in terms of where we are today and then what we have done and then also how this new BSA system, people and process and procedures that we put together that work really well in our organization in terms of making sure that we are in strong compliance and making sure that we're still out there taking good care of customers. Keep in mind when you talk about expenses, from 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 still get record earnings year in and year out. That's why we know, as I said earlier, that I don't get too worried about efficiency ratio because that's just one factor there. We obviously at the end of 2014 when we recognized we have some deficiency in BSA area, that we more than tripled the cost, tripled the staff in that area, but somehow found way to make record earnings in 2015 and 2016. I think that has to do with because that's what management's supposed to do. We're here to manage the company. When we manage the company, we know that there are expenses we need to spend, and we spend. While we have to spend the kind of money to take care of a regulatory challenge, we need to figure out, find way to make some money and work harder. Collectively, the entire organization, all the associates step up. They all work harder, 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. Another follow-up on expenses. Coming at it a different way, looking out to 2018, you mentioned that expenses will go wherever expenses will go given all the investments you're making. Would it be unreasonable to assume that expense growth could actually match or exceed revenue growth in 2018? Well, I guess it's hard to predict the future, of course, but I think Dominic Ng made the point very strongly that the history of East West Bank has been an ability to invest prudently and for the future and fund that investment with adding new customers, growing revenue, whether it's NII through the loan book or whether it's non-interest income. Sitting here today, I don't think any of us have any reason to expect the future's going to be different than the past. Since we have so much discussion expenses, I guess let me just see how I can better answer it. Well, I've been involved with the bank for 26 years, so from 1991 to 2007. Except 1996, that one year that we did not have record earnings. The reason that we didn't have record earnings in 1996 was because we were a savings and loan back then. 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&Ls. So in 1996, we got a one-time SAIF assessment. So that one-time assessment took our record earnings down, our consecutive record earnings down, that 1996, even though we made money, but it went down. So from 1991 through 1995, we had record earnings every year. It went down in 1996 to reasonable earnings. Then 1997, we picked up record earnings all the way through 2007. Then 2008, for the first time in the history of East West, we lost money. We made money in 2009, not record earnings, though. 2010 to now, to 2016, record earnings every year. Is it likely that we will have expenses exceeding revenue growth? Possible, because it happened in 2008. So I hope it doesn't happen, but it's possible. I just hope it doesn't happen. So our position is that we do our best to make sure that we continue to run the business like the way we have always run. All I can say is that based on the balance sheet that we have, based on the product capabilities, based on the talents and the geographic reach, East West then had a much harder time to do what we do, what we're going to be doing in the future. So in that standpoint, I tend to have a slightly better confidence and be a little bit more optimistic that I think that the future should be pretty good based on the macroeconomic condition that we see today, barring any kind of disaster 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, is that can't really project any exact economic outcome that will be happening. But one thing you can count on that we have management here is that on a day-to-day watching our shop and do what I call what's right. I am not too particularly honing into one particular line item. Sometimes we wanted to spend a lot of money simply because the opportunity is so enormous, and we have to spend, that kind of things. But it's always going to be rational. It's never going to be something that we lack the ability to manage. But it's more like that we somehow see something rational that may not necessarily be as apparent to the public, maybe at one quarter to two quarter at a time, but in time, it always worked out good. 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? Well, at this point, if you look at where we are today, we have a 19%, I mean, organic loan growth annualized. It's really hard to beat. Of course, I'm not expecting that to be on a quarter to quarter basis, I mean, to the growth basis. But even if you talk about, as Greg just mentioned, about this low double-digit loan growth, it's still, relatively speaking, better than most of the financial institutions in the country. So I'm sitting here, I said that, "Why would I wanted to do acquisition if things are going like the way it is right now?" So our position is really Now, but I would do acquisition if someone come in and say that, "We love East West so much. You can buy me at less than two times book." Then you have all this ability to consolidate, squeeze out all the costs, et cetera. Of course, I would do it, right? So it's all, again, relative. It's like rational management making rational decision. If you look at back in the early 2000s, we basically made one acquisition a year for many years, and every one of them were at extremely attractive price. And that's why we did it, because despite the fact at that time we have strong loan growth and strong organic growth, we bought them anyway because they're willing to sell it to us at a very, very reasonable price. Plus, we have great opportunity to consolidate the cost out. So when that opportunity comes, love to do it. But if we look at the current landscape, if we don't find anything, that's why we have to be independently capable, which is as long as we can have this organic loan growth, as long as we continue to build out our capabilities, spend the money, build out the capability, one product, one additional team at a time, we will be able to get ourselves to sustain this kind of growth pattern, and then with or without M&A, we're okay. So that's our strategy. It's like a rational strategy, not that we will be averse to making acquisition once we get the written agreement lifted. It's really based on what's rationally better for us. The next question will come from Dave Rochester of Deutsche Bank. Please go ahead. Hey, good morning, guys. Morning, Dave. Not to beat a dead horse here, but on the expense side, I think this efficiency range you talked about is getting a lot of questions because the mid-40s part of that just implies a much faster expense growth rate than you've seen this year. I know you're talking about timing the spending if it seems appropriate and reasonable, and that all makes 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 that low 40s range going forward? Well, we're trying to figure out how to answer the question another way again. I guess if you step back, what we want to make sure we're making a couple of points clearly, right? One is that we see both opportunities to continue to enhance infrastructure, technology, processes, procedures. Some of that is to support further growth in the business from an infrastructure perspective, and some of that is around customer acquisition, and some of that is a little bit of both, as Dominic Ng discussed, in terms of digital mobile banking for our retail customers. I think the first point that 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've tried to make is that we believe over time that our revenue growth is going to be sufficient to support those investments in the way that we've been able to do that historically. I think we want to make the third point, which is we don't focus on the efficiency ratio. Obviously, if you grow revenue more than you grow expenses, it's going to have an impact on the efficiency ratio. But our point is it's going to bounce around a little bit as you go quarter over quarter, depending on the timing of some of this. I think we've made the point before, particularly as you make front office investments in teams, sometimes the revenue follows behind that. The good thing about that is if you don't think the revenue is going to start to come, you can reduce the expenses there pretty fast. But sometimes on the revenue-producing side, you invest a little bit ahead of the revenue coming in. That's why we're trying to say if you're going to be very focused on an efficiency ratio, it's probably going to be within a range over time, because the timing of some of the investments can't fully be controlled. Okay, great. I really appreciate that. Thank you. Just 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 is now just over 90% of the 91. Still a healthy level. I was just wondering how high you expect that to trend and how you are thinking about deposit growth going forward. Yeah. Well, I think I would make it the sort of the two points that we had called out. One is that I think for this particular discussion, it is 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 is why I think you are hearing us be 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. As Dominic Ng noted, some of that was doing more with our existing customers, some of that was adding new customers. When we add those new customers, getting their operating accounts and so forth. 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 quarters. We are very comfortable with where we are on the number, and we are very comfortable with our ability to move the levers in order to make sure we can fund whatever loan growth we turn out to have in the fourth quarter. The next question will come from Michael Young of SunTrust. Please go ahead. Hey, thanks. Just to follow up on the deposit portfolio, could you provide any color on how much of that is coming from more of the retail portion of the bank versus how much is commercial? Maybe just characterizing relative to growth year to date or some way like that. I don't have the specific numbers in front of me, Michael, but year to date, when we look at the trends, both from a retail perspective and a commercial perspective, the growth has been very good. I wouldn't say necessarily one category was so much greater than the other. It does fluctuate, especially on the commercial deposits as far as the balances go. But both segments of the business are doing well. Okay, great. 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 that may be associated with those? I think on the commercial side, it actually kind of goes the other way, if I'm understanding your question. Generally, we're in discussion with a commercial customer about a loan. As Dominic said, coming along with that loan will be the operating accounts associated with the business that the customer is running and that we're financing. To some degree, whether the loan is all fully funded up front or not depends a little bit on the customer's business and the type of loan. But we generally put that in place and then have the operating accounts, and those operating deposits maybe tend to build over time. Of course, if you pick the right customers, their businesses are growing, et cetera. 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. 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. We are looking forward to talking with you again in January 2018. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.