Earnings Call: Q3 2016

Oct 20, 2016

Good day, and welcome to the East West Bancorp third quarter 2016 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 telephone keypad. 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. Please go ahead. Thank you, Aronson. Good morning, and thank you everyone for joining us to review the financial results of East West Bancorp for the third quarter of 2016. With me on this conference call today are Dominic Ng, our Chairman and Chief Executive Officer, Irene Oh, our Chief Financial Officer, and Greg Guyett, our President and Chief Operating Officer. We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For a more detailed description of 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, 2015. Today's call is also being recorded and will be available in replay format on our investor relations website. I will now turn the call over to Dominic. Thank you, Julianna. First I wanted to welcome Julianna on joining our team. It's nice to have her by our side, providing answers instead of asking questions on earnings calls. With that, good morning, and thank you for joining us for our earnings call. Before we dive into our third quarter discussion, on behalf of the board of directors, senior management, and all associates, I also want to welcome Greg Guyett, our newly appointed President and Chief Operating Officer to East West. Greg is a seasoned professional with over 30 years of corporate and international banking experience. Greg will be responsible for overseeing our commercial banking business, international banking, treasury management operations and support functions, and information technology. We're excited to have him on board and look forward to his leadership and contributions. With that, I will briefly turn the call to Greg so that he can say a few words. Well, thanks, Dominic. Good morning to everyone on the phone. I look forward to meeting each of you once I've had some time to settle into the new job. I'm very delighted to have joined East West. It's such an exciting time here as we continue to grow the business by investing in our core banking franchise and all the associated infrastructure, and by capitalizing on the opportunities inherent in our differentiated bridge banking business model. It's also a real pleasure to join the talented associates here at the bank, and to use my experience building and leading international businesses, along with the rest of the leadership team, to continue East West's history of consistently delivering shareholder value. Thanks, Dominic. Thank you, Greg. Now on to our financial results for the third quarter of 2016. Net income for the third quarter of 2016 totaled $110 million, or $0.76 per diluted share, an increase in diluted earnings per share of $0.05 or 7% from the prior quarter, and $0.11 or 17% from the third quarter of 2015. It was a record level of third-quarter earnings. We earned a return on average assets of 133 basis points and a return on average equity of 13.1%. Third quarter 2016 results reflect East West's continued focus on prudent growth and strong profitability. Total loans grew by 8% annualized on a sequential quarter basis. Excluding the impact of variable accretion income, the adjusted net interest margin expanded from the prior quarter. Strong core fee income growth increased total revenues to $303.5 million, an increase of 2% quarter-over-quarter. An ongoing expense discipline kept the efficiency ratio at a low 45%, supporting a steady pre-tax, pre-provision profitability ratio of 2%. In my remarks, I'm going to comment on loan and deposit growth, net interest margin trends, and asset quality. Additionally, I will provide an update on the progress we're making on improving our BSA/AML compliance program. First, let me discuss some key trends in loan growth. Total loans grew $485 million from June 30, 2016, to a record $24.8 billion as of September 30, 2016, equivalent to 8% annualized growth. This is a very good result and 2% better than what we had projected last quarter. The loan sector with the largest increase during the third quarter of 2016 was commercial loans, which increased by $194 million or 2% linked quarter and 9% year-over-year to $9.4 billion as of September 30. Line utilizations of commercial loans in the third quarter of 2016 have stabilized and were 68% as of September 30, compared to 69% as of June 30. Our focus and the growth within commercial loans have been on our specialized industry verticals, which provide a differentiated value proposition to businesses in helping to facilitate cross-border strategies for our client base. As of September 30, specialized industry commercial loans outstanding were $3.2 billion, or 34% of total commercial loans, an increase of $169 million, or 6% from June 30. Year-to-date, specialized industry commercial loans have grown by 19%, compared to 4% year-to-date growth for commercial loans as a whole. We expected that with our unique positioning as the bridge between the East and the West, we will continue to have stronger growth in these specialized industry niches, lifting overall portfolio growth as the verticals gain traction and grow in size. This quarter, we saw the greatest contribution to growth from our energy finance and private equity groups. Commercial real estate loan balances total $7.8 billion at the end of the third quarter, essentially flat relative to June 30. Based on our current forecast, we expect commercial real estate loan balances to grow modestly for the remainder of 2016. As of September 30, East West Bank's commercial real estate concentration, based on FFIEC definition, was 261%, compared to 265% as of June 30, and well below the 300% threshold. Now, let's move on to deposits. As of September 30, total deposits were $28.6 billion, an increase of $375 million compared to $28.2 billion as of June 30, 2016, equivalent to 5% annualized growth. During the third quarter, average deposit balances of $28.3 billion grew by 3% annualized, with core deposits growing by 8.5% annualized and non-interest-bearing demand deposits growing by 12% annualized. Average core deposit comprised 80% of average deposit in the third quarter of 2016, and average non-interest-bearing deposit comprised 33% of average deposits. Our liquidity remains strong, and our average loan-to-deposit ratio during the third quarter was 86%. Third, I would like to highlight our core net interest margin, which expanded during the third quarter despite a tough operating environment. Excluding the impact of purchase accounting discount accretions, which is variable, our adjusted net interest margin in Q3 2016 was 3.16%, a modest linked-quarter expansion of three basis points. Year-over-year, our adjusted net interest margin expanded by 10 basis points from 3.06%. The year-over-year net interest margin expansion came from improved loan portfolio yields, excluding the impact of purchase accounting discount accretions and a greater contribution of demand deposits in the funding mix. Next, I would like to take a few moments to discuss our ongoing risk management enhancements. Our highest priority for this year has been to improve our Bank Secrecy Act and anti-money laundering program. As previously discussed, as part of the written agreement we entered with one of our primary regulators last year, we have an action plan outlining the steps that we are taking to ensure compliance with the BSA/AML rules and regulations. We believe we are making satisfactory progress towards the written agreement and action plan. During the third quarter, we successfully implemented the transaction monitoring module of our new BSA software, a critical component of the software and a significant milestone. For the third quarter of 2016, total consulting expenses were $4.6 million, and 60%, or $2.8 million of it, were BSA/AML related. The BSA/AML-related consulting cost for the third quarter of 2016 was 36% lower than in the second quarter of 2016 and 57% lower than in the first quarter of this year. We expect that these consulting costs will continue to decline for the remainder of 2016 and reduce substantially in 2017. It is important to highlight that even with these elevated investments we are making to improve our compliance and risk management programs, given our strong financial performance, we have industry-leading return ratios with quarterly pre-tax, pre-provision profitability of 2% and return of assets of 133 basis points and return of equity of 13.1%. Finally, I would like to make some comments about asset quality. This quarter, annualized net charge-offs increased to 37 basis points of average loans, compared to one basis point in 2016 or nine basis points in year-ago quarter. Provision expense did not increase at the same level, as 75% of the charge-off amounts to the third quarter had been provided for as of June 30. In third quarter 2016, East West recorded a provision for loan losses of 19 basis points annualized compared to 12 basis points annualized in the prior quarters and 15 basis point annualized in the year-ago quarter. The majority of the charge-offs during the quarter were a result of three larger commercial loans that had been placed on non-accrual status a year ago. These three loans were originated several years ago. The borrowers were in unrelated industries, and none were part of our specialized commercial loan industry portfolios. At this point, we do not see these discrete problem loans as indicative of broader trends across industries or across our portfolio. A more positive asset quality trend was the $46 million or 26% decline in non-performing assets to $130.5 million or 39 basis point of total assets as of September 30, 2016, compared to June 30. Although charge-offs for the third quarter were elevated, non-accrual loans, delinquencies, special mention, and substandard loans were all down as of September 30, 2016, compared to the end of the second quarter. With that, I would now like to turn the call over to Juliana to discuss our third quarter 2016 financial results in more depth, review our capital position, and discuss our guidance. Now, this was supposed to be Irene's area to cover this morning, but she spent so much time talking to many of you yesterday, and she ended up losing her voice. So Irene, you wanted to at least say hello so they can hear your baritone? Hi, everyone. I'm still here, and hopefully, I'll be able to participate in the Q&A section. Okay. With that, Juliana. Thank you very much, Dominic and Irene, and I do hope Irene feels better very quickly. Welcome, everyone. Starting with net interest income. Net interest income of $254 million for the third quarter of 2016 was $564,000 higher than the second quarter of 2016 and $14 million or 6% higher than $240 million for the third quarter of last year. Interest income on loans grew by $7 million or 3% linked quarter, fully offsetting a 6% decline in purchase accounting discount accretion income. Year-over-year, growth in net interest income was primarily driven by growth of the loan portfolio, which significantly exceeded year-over-year declines in purchase accounting loan discount accretion income. As highlighted by Dominic, excluding the impact of the purchase accounting loan discount accretion income, third quarter 2016 adjusted net interest margin was 316 basis points, an increase of three basis points from 313 basis points in the second quarter of 2016, a year-over-year increase of 10 basis points from 3.06% in the prior year quarter. The year-over-year adjusted net interest margin expansion reflects improvement in adjusted loan yields and an increased contribution from non-interest-bearing deposits in the funding mix. Adjusted average loan yields were stable at 4.05% linked quarter and improved by five basis points from 4% in the prior year quarter. The cost of all deposits was 30 basis points for the third quarter of 2016 compared to 29 basis points and 28 basis points for 2Q16 and 3Q15 respectively. The cost of interest-bearing deposits was 44 basis points for the third quarter of 2016 compared to 43 basis points and 40 basis points for 2Q16 and 3Q15 respectively. Declines in the GAAP net interest margin, which was 3.26% in 3Q16, reflect declining purchase accounting loan discount accretion income, which was $7 million in 3Q, $13 million in 2Q, and $18 million in the year-ago quarter. As of September 30, 2016, approximately 70% of the bank's loan portfolio is tied to Prime or LIBOR indices, and we expect that as a result, we are well positioned to benefit from incremental increases to the Fed funds rate. Details of East West asset sensitivity position as of September 30 will be provided in the third quarter 10-Q filing but should trend similarly to the prior quarter end. During the third quarter of 2016, the average loan portfolio of $24.3 billion grew by 7% annualized on a sequential quarter basis and grew by 9% year-over-year. Average deposit balances of $28.3 billion grew by 3% annualized on a sequential quarter basis and grew by 8% year-over-year. The largest growth in average core deposits came from non-interest-bearing demand deposits, which comprised 33% of total average deposits in the current quarter, a favorable mix shift from 30% in the prior year quarter. Moving on to non-interest income and expense. Strong core fee income growth in the quarter helped support 2% operating revenue growth in the third quarter compared with the second quarter. Non-interest income of $49 million for the third quarter of 2016 increased $5 million or 11% from $44 million in the second quarter. The sequential quarter increase in non-interest income was largely due to a $4 million increase in other fees and other operating income, which included a $2 million increase in fees from assisting customers to hedge interest rates, as well as a $2 million increase in ancillary loan fees and a $1 million increase in wealth management fees, partially offset by a $2 million decrease in net gains on sales of securities and loans. Non-interest expense for the third quarter of 2016 totaled $170.5 million, a 15% increase from $149 million last quarter, reflecting a $19 million increase in the amortization of tax credit investments, which were $33 million in the current quarter compared to $14 million in the prior quarter. The increase in the third quarter tax credit amortization expense was a result of new tax credit investments in the quarter. Correspondingly, these new tax credits largely drove the decrease in the full year 2016 effective tax rate to 23% versus 26% previously. Operating expenses, excluding tax credit amortization of $138 million in 3Q16, increased by 2% linked-quarter and were in line with our guidance. Further, East West adjusted efficiency ratio was essentially stable at 45% in the third quarter of 2016. The company's effective tax rate for the third quarter of 2016 was 11%, compared with 28% for the second quarter of 2016 and 32% for the third quarter of 2015, reflecting an increased level of investment in tax advantage credits during the third quarter and a $3 million discrete tax benefit from a favorable tax settlement during the quarter. At this point, we estimate that for the 2017 tax year, we will have approximately $90 million in tax credit investments with an associated $80 million in amortization expense. Next, I will make some comments about our capital position. Linked quarter, East West capital ratios increased. Tangible book value per share grew $0.56, or by 3% linked quarter, to $19.92 as of September 30, 2016, and the tangible common equity ratio increased to 8.8%, up from 8.6% as of June 30. East West's board of directors has declared fourth quarter 2016 dividends for the company's common stock. The common stock cash dividend of $0.20 per share is payable on November 15, 2016 to stockholders of record on November 1, 2016. Lastly, I'll discuss our guidance. We are updating our guidance for the fourth quarter and full year 2016. We currently estimate that fully diluted earnings per share for the fourth quarter of 2016 will range from $0.70 to $0.72, resulting in fully diluted earnings per share for the full year of 2016 ranging from $2.91 to $2.93, an increase of $0.25 to $0.27, or 9%-10%, from $2.66 for the full year of 2015. This is an increase from the previous guidance range of $2.83 to $2.87. The revised guidance factors in the results of the third quarter and a penny increase to our previous expectations for the fourth quarter of 2016. The EPS guidance for the remainder of 2016 assumes 4Q loan growth of approximately $470 million or 8% annualized, which is 2% better than what we had expected a quarter ago. We currently estimate that the net interest margin will moderate slightly from the third quarter of 2016 and are assuming accretion income of $7 million, similar to the third quarter. We are estimating provision for loan losses of approximately $5 million in the fourth quarter, unchanged from previous expectations. Further, we expect operating expenses, excluding the impact of $23 million of estimated tax credit amortization, to be in line with the third quarter results. Finally, we estimate that effective tax rate for the fourth quarter will be 25%, translating into a full year tax rate of 23% for 2016. With that, I will now turn the call back to Dominic. Thank you, Juliana. In summary, East West delivered record third quarter results. Our stable adjusted net pre-tax, pre-provision profitability ratio of 2% is a strong result, supported by good loan growth, modest net interest margin expansion, robust core fee income growth, and disciplined efficiency. We're well on our way to another year of record earnings. I will now open the call to questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star and then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star and then two. Our first question comes from Jared Shaw of Wells Fargo Securities. Please go ahead. Hi, good morning, everybody. Good morning. Just first on the regulatory costs and the consulting costs, you said there was $2.8 million. Once we get into 2017, will that eventually go away or fall down to zero, or will there always be a tail of some consulting costs associated with the new system put in place? It would not go down to zero. As we have, I think, discussed in the previous quarters, we are going through our program on a step-by-step basis. For example, a substantial amount of cost this year has to do with having consultants to help us on these systems and also remediation type of work. We will hopefully complete all the remediation work internally by East West by the end of this year. However, after the remediation, we will need to have outside consultants to come in to validate our remediation work. That would take place probably in the early second quarter. I would expect that at a minimum, there will be maybe a second quarter. I think that the expenses depends how the consultant bill us and then what we need to accrue and so forth. I would expect that there will be some cost, without a doubt, somewhere between the first, particularly in the second quarter. That's what we're expecting now. Overall, the total consulting expenses for 2016 will be higher than 2017, for sure. We'll continue this decline going forward. I would expect that by 2018, there will be very minimal consulting expenses. Okay, thanks. Could you give an update on the strength of the CRE market in your areas? A lot of banks, a lot of your competitors are under pressure with the capital concentration. Is this potentially opening up an opportunity to see more growth coming from commercial real estate? I think, one of the advantage that we have is that East West have always had the discipline to make sure that we always be prudent. That's why when we had some very robust CRE growth for the last couple of years, and obviously because we're in all the major metropolitan market that have very strong commercial real estate growth, including, of course, Southern California, Los Angeles and San Francisco, Silicon Valley, Seattle, Boston, New York. These are all areas that East West have presence. We have enjoyed nice growth in our CRE. But when it get to the point, it inching closer to that 300% threshold, we decided that we will pare down by selling down some of the CRE loans to some of our good neighbors banks. We have successfully pared down these loans in the first and second quarter. As we have just talked about earlier, we are down to 261% of CRE concentration to our capital. So we have plenty of room to grow. That is a fact. However, we are not going to be quickly running up to that 300% limit. That is one. The second thing is that we also have to take a look at the market from a macro level. The real estate market in the last 6 years have enjoyed very nice price appreciation year in, year out. Ever since the financial crisis, 2009, I think starting in 2011, price keep inching up. So we already have 5, 6 years of appreciation. So I look at it is that the upside is not that strong going forward. Also, with about 5, 6 years of no increase in interest rate, the probability of rate going up is obviously higher than it had before. A combination of interest rate will be inching up. Real estate have enjoyed appreciation for so many years. I do not see a lot of upside on this real estate market in the next several years. East West will continue to make CRE loan for our longtime loyal customers, and also all the sophisticated real estate investors that have the discipline to find the right deal. But we are not going to be looking at this as a substantial high growth area, simply because looking at the macro level, I would expect that the volume of commercial real estate purchase and sales will be slowing down compared with what it was for the last couple of years. From that standpoint, I would say the overall volume come down a little bit. We are just going to keep focusing on taking care of our clients. If clients have some good deals that they want us to get into quickly, and we have the capacity to do that, if clients have some refinancing needs from us, we will be able to step up without any problem. On top of that, we have shown to ourselves that we can quickly sell down loans. So anytime we have a client that have a big request, we can always find participating banks that can join us to do the deals anyway. So we are pretty confident that we will be able to take care of our clients. But on the other hand, I am not expecting some very substantial high growth in the CRE area. Okay. So when we look at the growth that you had in the specialized verticals, the fact that a lot of the investment, both from time and money on the BSA/AML has been put in, and then looking at that $470 million growth target or expectation for fourth quarter, what are you seeing, I guess, to see a slowdown in growth going into fourth quarter versus what we saw for third quarter? We actually, right now, so that's why we're projecting the 8% loan growth in the fourth quarter, annualized, instead of what we projected last quarter at 6%. And the reason is because our pipeline is getting stronger, and many of them are coming from C&I, and specifically from a lot of those specialized commercial loan industry portfolios that have relevancy to our bridge banking strategy. So we expect that to continue to grow, and I think that we feel pretty good about what's going to be happening in the fourth quarter. So at this point, we do not see that we will be slowing back down. I don't know whether I've answered your question or not. Yeah, no. That's good. Thank you very much. Okay. Our next question comes from Dave Rochester of Deutsche Bank. Please go ahead. Hey, good morning, guys. Good morning. Just on the tax strategy, the $90 million in tax credits, does that get you roughly to a 25%-26% rate, similar to what you were expecting originally for 2016? Dave, obviously, that depends on the total income, but that sounds about right. Okay, great. Thanks. Then, just back on the loan growth, that was a bit stronger than what we were expecting this quarter, and it sounds like your 4Q outlook is pretty healthy as well. Can you just talk about how you're thinking about loan growth next year? Is it possible to see a return to that 8% annualized rate through next year if the current environment persists? Dave, we normally do not really have our final budget put together until later on this year. We will give our official guidance for 2017 in our January earnings call. In the meantime, if you ask me today, all I see is what I've got in front of me in terms of the pipeline. Right now, the pipeline looks pretty good. I expect that if we continue to keep executing in the right direction. Obviously, one of the big advantages that we have at East West is that we have selected a niche, this bridge banking niche that's focusing on this U.S.-China connection, with a very unique value proposition that we have because of our network and branch facilities in between U.S. and China. That has differentiated ourselves from many of our peers. For that reason, I think we're always going to be able to find work without as much intense competition like most of the other regional or community banks. With that said, I think we just have to go out there and continue to execute and find the right deals and book them. If we keep doing what's right, I think that we will be able to have stronger loan growth than the others. Would it be 8%? Would it be 10%? Would it be some other percentage? I don't know at this point, but I think that most likely, we will be able to have, at this moment, looking at where we are right now, we will most likely have a healthy growth. I appreciate that color. You'd mentioned the level of rates coming into play in your decision to grow faster or slower. I'm just wondering, if we do get a rate hike in December, would you be more focused on growing loans potentially stronger in that kind of a higher rate environment? No, not really. For one, I hope that my lending officer would not slow down because the higher rate get us a higher margin, and then our earnings are so much stronger, and then they just didn't think that they need to work. Our position is that we grow our loans because we have good value propositions that differentiate ourselves from the others. As long as we do a good job and the clients appreciate what we're doing for them and they keep coming back or they keep referring their friends and others to us, we will have stronger growth. The other thing that I think is important for us is that if you look at the last 4 to 5 years, our specialized industries verticals are a continuing evolving process. Obviously, four years ago, when we started in the entertainment business, it was just the beginning. The first year we have just a very small origination. As of today, we already have commitments that are over $1 billion, and with $600 million, $700 million outstanding balance. Our private equity sector also started right around that time and have similar results. We just started the energy business end of last year. First three months or so, we intentionally not trying to jump into the market too strong. This quarter, the energy sector took the lead in terms of outstanding balance in origination. Each year, hopefully, if we can identify one or two more new verticals that is relevant to our strategy and we build on it, we'll continue to have more and more opportunities to provide loan growth. What we don't want to do is to stress ourselves too much in too few of a product, and then ultimately create concentration. One of the key things that we focus on in terms of our risk oversight and risk management is that we'll continue to focus on diversified loan portfolio. If loans getting too big, we have to sell down. If loans get so big that no one wants it, then we have to ask ourselves, is this the right loans that we want to keep? As long as we keep going in that direction, we would not be, hopefully, taking too much of a hit when it comes to recession time. I think a good example is the commercial real estate. We could have double-digit growth in CRE easily. We've done that in 2014 and 2015. There's no reason we could not do the same thing in 2016. In fact, many banks are doing just that. We chose not to because we have the ability to grow the other verticals, and we also want to make sure we continue to have a very diversified mix in our loan portfolio. That's the reason why we're always going to be managing things. Maybe looks like a little bit too early than some of the folks see from the outside. I think that it's for good reason, because as long as we keep the portfolio mix very diverse and at any particular moment, any particular time, there's always going to be one sector that may be in trouble. What we want to do is that if we're ever going to get, unfortunately, into that half that have exposure in that one particular sector, hopefully the dollar amount is not that big. Yeah. Okay. I appreciate all the thoughts there. Thanks. Thank you. Our next question comes from Michael Young of SunTrust Robinson Humphrey. Please go ahead. Hey, good morning. Good morning. Dominic, I wanted to start off with just asking a big picture question on investment and maybe expansion activities from here. I know you've been somewhat limited by the BSA/AML order, but as we move through resolution of that into this year, next year, are there certain expansionary activities that you've had in mind that you'd like to pursue in 2017? Well, in terms of 2017, I think that right now I look at it is that if anything about expansion is basically sort of human capital. Greg Guyett is an expansion. Juliana is another expansion. Just right here, four of us, we have a 50% increase of new players. I like that, though. I really enjoy bringing new people that have a very strong in-depth experience that we didn't have before. That's what East West is all about. We continue to evolve. We continue to grow. When we grew, we looked at what we lacked, and we add to it. We obviously, if you looked at right after we acquired United Commercial Bank, we didn't have any expertise in private equity, in life science, in oil and gas, in agriculture or in entertainment, et cetera. We add those experiences in the bank to help us to grow stronger, to help us to become a more diverse organization with multiple products and capability to service our clients. In 2017, Greg and I will have plenty of discussion to explore what additional verticals that we can potentially capitalize on in the future. But it's too early for us to highlight anything specific. Most likely, we're not going to do any brick and mortar type of acquisition. Okay, great. And separately, I guess, on the capital side, with maybe a more moderate growth rate at 6%-8% on the loan growth side and more limited CRE growth so that you're well clear of the 300% threshold, do you have plans for maybe additional capital returns going forward? Not at this point. I think that we feel very comfortable with our capital. At this stage, we have plenty of earnings to support dividends and also future loan growth. However, opportunities may come someday in terms of future loan growth or any type of other opportunities may come that I don't want to, at this stage, to too hastily start returning capital too soon. And the other thing is that if I look at our peers with our size, most of them have a lot of excess capital. So it would be somewhat not prudent for East West to start looking into returning capital when most of the others haven't. So I think at this point right now, I think most likely you expect that we'll continue to inch up our capital ratio. Okay, great. Thanks. Once again, if you have a question, please press star and then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. Our next question comes from Gary Tenner of D.A. Davidson. Please go ahead. Thanks. Good morning. Good morning. A couple of quick questions. First, I wonder if you could just remind us where your loan yields are by major loan segment in terms of commercial real estate particularly and single family residential. Gary, so if you look at the loans we originated in the third quarter. So for C&I, it was around 4%. And then CRE, about I think 358 or so. Single family, I don't have in front of me. Generally speaking, it has been declining from the really high yields we enjoyed before when we really kind of had a monopoly on this reduced doc loan program. So that is something that has continued to decline. I want to highlight that if you look at our CRE portfolios, quite different than many of our competitors here, is that everything's adjustable. We have many of our clients who prefer fixed rate, and so we did a swap on it. And that's why the CRE yield actually tends to be lower than many of our peers who actually have just put in a fixed rate without hedges. Okay, thanks. Dominic, you've talked a lot over the quarters about utilization rates on C&I loans, and you made the point that they stabilized this quarter. Do you think there's anything in terms of any seasonal impacts on trade finance or anything that had that impact, or do you think this is a sign of true stabilization? I think that the answer is yes to both. I think that what happened is this, is that one is trade finance do tend to move up near the end of third quarter and then throughout the whole fourth quarter until after Christmas. However, our trade finance portfolio as a percentage to our overall C&I loans have continued to reduce. Years ago, our primary C&I loans were the import-export business, predominantly in the import. And so that's why the seasonality makes a difference. We can predict the trend very well because it's always slow down the first quarter and then gradually inch up, and then sort of plateau in the fourth quarter. Today, we have all these industry specialized verticals, entertainment, private equity, technology, life science, and all the others. They all are different behaviors. And when those specialized industry verticals have continued to grow in size and this trade finance portfolio becomes smaller and smaller as a percentage to our overall C&I mix. If I look at where we are today, the 68% utilization, I don't see a whole lot of upside right now at this point compared with, let's say, seven, eight years ago, I would say that I'm pretty much sure that the C&I balance will go up next quarter simply because that's the seasonality. I think that small percentage of the trade finance seasonality will be there, but the rest of them, they behave differently. But the nice thing about having a more diverse balance, I think that we can somewhat project it that if this is where we are, chances are there is a high likelihood in the fourth quarter we're somewhat in the similar level. Okay, thank you. Our next question comes from Matthew Clark of Piper Jaffray. Please go ahead. Hey, good morning. Good morning. Just curious if you sold any CRE loans in the quarter with the balances down. Not in the third quarter. The vast majority was sold in the first quarter, and we have some remaining in the second quarter. The second quarter's that was sold is really the residual. Those are all supposed to be all done in the first quarter because I want to do a quick two-month testing to see how quick we can sell down. It's kind of like one of those, I would say, emergency tests and just to see how quick we can turn around and sell down loans. Then we did that. Then there were some residual that we ended up selling in April. So that's what happened the first and second quarter. But in the third quarter, we did not have any loan sale for CRE. Okay. In terms of your core expense guidance, I think for the fourth quarter being comparable to the third of $136 million, ex that tax credit amortization, how should we think about that run rate, in 2017? Can you repeat the question again? I didn't hear it. Sure. Just thinking about your core expense guidance for the fourth quarter being comparable to 3Q of $136 million. Just curious how we should think about that run rate in 2017. Okay. As I said earlier that we will give you the formal guidance in January 2017. But in the meantime, based on what we've seen today, I would say that most likely at this point, 2017 expense will be in line with 2016. We're going to probably have a slightly more headcounts, payroll expenses, which will offset against these elevated BSA compliance cost for 2016, and net net will probably come out flat. That's what we are looking at at this point. Are you talking about flat with the fourth quarter, or are you talking about flat with the core expenses in 2016? Flat with 2016. Am I correct? Take a look, Matt. There's no difference, really. Got it. Yep. Okay. Last one, just in terms of the tax credit investments as we look into 2018, I know it's a ways from now, but just curious if it's fair to assume a similar amount of investments and related amortization in 2018 for now. Matthew, 2018's pretty far in advance for right now. We'd look at what kind of opportunities are there, and really it's a function of return relative to risk and how comfortable we are. So, it's a little bit early to comment on that. Fair enough. Thanks. Once again, if you have a question, please press star and then one on your telephone keypad to enter the question and answer queue. Our next question comes from Chris McGratty of KBW. Please go ahead. Good morning. Thanks for taking the question. Good morning. Good morning, Dominic. The fee income trends were particularly strong in the quarter, and you called it out in the release a bit. Wondering if you could further elaborate on perhaps the strategies you're implementing and the sustainability into next few quarters. Yes. In fact, we working hard at it. We looked at, again, I think from foreign exchange. This quarter, I think we were doing quite well with the swaps. If interest rates start spiking up much higher, then I think that the opportunity of swap would obviously diminish. But the good news is that the NIM will come back much stronger, and we'll offset against that. I think some of the areas that we know is much more sustainable is that looking forward, the more that we are doing business that have that U.S.-China elements, the more likely that we have additional international clients that we will be able to do more foreign exchange business. The entertainment sector is a good example. Most of our studios in the United States actually do worldwide distribution, and so they have a lot of foreign incomes coming in. Therefore, I think that the opportunity for us, whether it is in the entertainment space or some of these, for example, like life science or technology companies, they all have foreign receivables, and so it give us opportunity to work on additional foreign currency hedging business for our clients, and we expect that to grow. We hopefully will continue to gain market share in the import/export business, and with that, we'd expected a more fee income for the trade finance fees. One of the areas we have not done as well is the Ex-Im Bank because of the challenge in Washington, D.C. Now, I don't know what's going to happen after the first week of November at the election, but hopefully sometime next year, maybe the Ex-Im Bank starts getting back into real business, and that would help us to increase more fee income. Wealth management, we have every intention to grow it one step at a time. So we figure out that there are enough areas out there that will help us to sustain consistent growth, and we're going to continue to keep working on it. Great. Very helpful. If I could ask a follow-up on the balance sheet. Looking at the cash and securities and investments, it is around $6.7 billion or 22% of earning assets. Is the outlook for that, do you guys target a ratio, a proportion of earning assets, or should we be thinking about the dollar level either growing or kind of stable for the next few quarters? That would be helpful. Thanks. We probably not going to emphasize too much on asset growth. I think that the growth that we're focusing on in the next year or two is high quality loan growth, high quality deposit growth. As you have seen in our deposit side, we continue to focus on changing the mix. I think we've done really well from 2009, after the acquisition of United Commercial Bank, we had so many CD customers. We have now converted to 80% of our deposit are core deposit, and 33% of our deposit are non-interest bearing demand deposit. These are kind of like direction that we're focusing on. While we are continue changing the mix, we also get some nice growth, too. Whatever growth we get, we get. Same thing for the deposits. Same thing for the loans. As long as we get good high quality loans that keep coming in, if that means that we will inch up the asset size, so be it. But we are not going to grow asset just for the sake of growing assets. Okay. Any loan growth, the earning asset growth will probably grow at a slower rate than the loan growth is kind of the main- That's correct. Because we have rooms from a liquidity point of view, from a loan deposit point of view. There's more likelihood that we will continue. If we grow more loans, we don't have to grow the asset. And you have sort of like seen that, in fact, the last two quarters. Great. Thanks for taking the question. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks. Okay. Well, thank you. We want to thank everyone for joining us today. It was another quarter of record earnings for East West, and our profitability remains strong, even as we continue to make important investments in the bank's franchise and infrastructure to support long-term shareholder value. We see attractive business opportunities within our differentiated bridge banking niche, supporting our long-term history of prudent growth. We are well on our way to another record year of earnings, and we look forward to speaking with you in January. Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.