East West Bancorp, Inc. (NASDAQ:EWBC)
Q3 2016 Earnings Conference Call
October 20, 2016 11:30 AM ET
Julianna Balicka – Director of Strategy and Corporate Development
Dominic Ng – Chairman and Chief Executive Officer
Greg Guyett – President and Chief Operating Officer.
Irene Oh – Chief Financial Officer
Jared Shaw – Wells Fargo Securities
Dave Rochester – Deutsche Bank
Michael Young – Suntrust Robinson Humphrey
Gary Tenner – D.A. Davidson
Matthew Clark – Piper Jaffray
Chris McGratty – KBW
Good day, and welcome to the East West Bancorp Third Quarter 2016 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Julianna Balicka. Please go ahead.
Thank you Ericson. 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 or 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. Well first I wanted to welcome Julianna on joining our team. It is nice to have her by our side providing answers instead of asking questions on earning calls. So 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 are 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.
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 rejoin at East West. It is 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 history of consistently delivering shareholder value. Thanks Dominic.
Thank you Greg and now on to our financial results for the third quarter of 2016. Net income for the third quarter of 2016 totaled $110 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 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, and 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 have 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 expect 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 grow from our energy finance and private equity groups. Commercial real estate loan balances total $7.8 billion at the end of 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 Banks 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 deposit. 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 deposit growing by 8.5% annualized and noninterest-bearing demand deposit growing by 12% annualized.
Average core deposits comprised 80% of average deposits in the third quarter of 2016 and average non-interest bearing deposit comprised of 33% of average deposits. Our liquidity remained strong and our average loan to deposit ratio during the third quarter was 86%.
Third I would like to highlight our core net interest margins, 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 third quarter of 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 portfolios excluding the impact of purchase accounting discount accretion and as greater contribution of demand deposits in the funding mix.
Next I would like to take a few movements to discuss our ongoing risk management enhancement. 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, outline 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 plans. 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 expense was $4.6 million and 60% or $2.8 million of it were BSA/AML related. The BSA/AML related consulting costs 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 would 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 program. Given our strong financial performance we have industry leading return ratios with pre-tax, pre-provision profitability of 2%. And return of asset 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-off 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 a same level as 75% of the charge off amounts to the third quarter had been provided for as a June 30.
In the 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 quarter and 15 basis points annualized in the year ago quarter. The majority of the charge-offs during the quarter were result of three larger commercial loans that have been placed on accrued status a year ago. These three loans were originated several years ago but borrowers were in unrelated industries and none were part of our specialized commercial loan industry verticals.
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 Julianna to discuss our third quarter 2016 financial results in little 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 loosing her voice. So Irene you want to at least, say hello so that they can hear your bear tone.[ph]
Hi everyone, [indiscernible] and hopefully I will be able to participate in the Q&A section.
Okay with that, Julianna?
Thank you very much Dominic and Irene and I do hope Irene feels better very quickly and 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 banks 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 noninterest-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 to 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 $1 million increase in wealth management fee 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 inline with our guidance. Further East West’s 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 though 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 Board of Directors have 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 01, 2016.
Lastly I will 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% to 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 $0.01 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 inline with the third quarter results. Finally we estimate that the 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 Julianna. In summary, East West delivered record third quarter results, our stable adjusted net pretax, pre-provision profitability ratios 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 are well on our way to another year of record earnings. I would now open the call to questions.
Thank you. We will now begin the question and answer session. [Operator Instructions] Our first question comes from Jared Shaw of Wells Fargo Securities. Please go ahead.
Hi good morning everybody.
Just first on the regulatory costs and the consulting costs, I heard you said there was $2.8 million. Once we get into 2017 will that eventually go away to – or fall down to zero or will there always be a tale of some consulting costs associated with the new system put in place.
It would not go down to zero and as we have I think discussed in the previous quarters we are going through our sort of like a program on a step-by-step basis. For example a substantial amount of cost this year has to do with having consulting to help us on sort of like these system and also remediation type of work and we will hopefully complete all the remediation work internally by East West by the end of this year.
However after the remediation, we would need to have outside consultant to come in to validate our remediation work. So that would take place probably in the early second quarter. So I would expect that at a minimum there will be sort of like maybe a second quarter bep. Well I think that the expenses depends how the consultant build us and then if we – what we need to accrue and so forth. I would expect that there will be some costs without a doubt that is somewhere between the first particularly in the second quarter. And so that's what we are expecting now and then overall the total consulting expenses for 2016 will be higher than 2017 for sure.
So we'll continue to reduce this decline going forward. And I would expect that by 2018 there will be very very minimal consulting expenses.
Okay thanks. Could you give an update on the strength of the CRE market in your areas and you know 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?
Well I think the – one of the advantage that we have is that East West have always have the disciplined to make sure that we always be prudent and that’s why when we have some very robust CRE growth for the last couple of years and obviously because we are in all the major metropolitan market that have very strong commercial real estate growth including, of course Los Angeles, Southern California, Los Angeles and San Francisco Silicon Valley, Seattle, Boston, New York these are all areas that East West have presence. And so we have enjoyed nice growth in our CRE but when it get to the point at 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.
And we have successfully pared down these loans in the first and second quarter and – as we have just talked about earlier we’re down to 261% of CRE concentration to our capital. So we have plenty of room to grow, I mean that’s the fact. However we are not going to be quickly running up to that 300% limit that’s 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 six years haven’t enjoyed very nice sort of price appreciation. Year in, year out ever since the financial crisis in 2009 I think starting in 2011 price keep inching up, so we already have five, six years of appreciation. So I look at it as the upsize not that strong. Going forward and also with about five, six years of no increase in interest rate and the probability of rate going up is obviously higher than they have before.
So a combination of interest rate will be inching up, real estate have enjoyed appreciation for so many years I don’t see a lot of upside on these real estate markets in the next several years. So again East West will continue to make CRE loan for our long time loyal customers that and also all the sophisticated real estate investors that have the discipline to find a right deal but we’re 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 purchases themselves will be slowing down comparable to what it was for the last couple of years. And so from that standpoint I will say the overall volume come down a little bit we just going to keep focusing on taking care of our clients.
And if the clients have some good deals do they want us to get in to quickly and we have the capacity to do that clients, if have some re-financing needs from us and we will be able to step-up without any problem. And then on top of that we have shown to ourselves that we can quickly sell down loans so any time 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’re pretty confident that we’ll be able to give our clients but on the other hand I’m not expecting some very substantial high growth in the CRE area.
Okay so we look at the – when we look at the growth that you had in the specialized verticals and then the fact that 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 our expectation for fourth quarter what are you seeing I guess, just to see a slowdown in growth going into fourth quarter versus what we saw for third quarter?
We actually – right now so that’s what we’re projecting to 8% loan growth in the fourth quarter annualized instead of what we projected last quarter at 6% and the reason is because our pipeline that’s getting stronger and many of them are coming from CNI and specifically from a lot of those specialized industries verticals that have relevancy to our bridge banking strategy. So how we expect that to continue to grow and I think that we feel pretty good about what’s going to be happening in 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.
Yes that’s good thank you very much.
Our next question comes from Dave Rochester of Deutsche Bank. Please go ahead.
Hi good morning guys.
Just on the tax strategy the $90 million in tax credits does that get you roughly to that like a 25%, 26% rate somewhere to what you are expecting originally for 2016?
Dave obviously that depends on the total income but that sounds about right.
Okay great thanks and 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 and can you just talk about how you are thinking about loan growth next year is it possible to see a return to that 8% annualized rate through next if the current environment persists?
Dave we normally do not really have our sort of like a final budget put together until later on this year and so we will give our official guidance for 2017 in our January earnings call. Now 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 is still pretty good I expect that if we continue to keep executing in the right direction. Obviously one of the big advantage that we have in East West is that we have selected a niche, this bridge banking niche that focusing on this US, China connection with a very unique value proposition that we have because of our network and branch facilities between US and China and that has differentiated ourselves from many of our peers. And for that reason I think we always going to be able to find work without as much intense competition like most of the other regional or community banks.
So with that fact I think we just have to go out there and continue to execute and find that the right deals and book them. And if we keep doing what’s right I think that we will be able to have stronger loan growth than the others. Now I mean would it be 8% would it be 10% will it be some other percentage I don’t know at this point but I think that most likely and we will be able to have at this moment looking at where we are right now have a, we are almost like to have a healthy growth.
I appreciate that color. You had mentioned the level of rates coming into play in your decision to grow fast or slower and 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 because I mean – that I hope that my lending officer would not slow down because the high rate get us a higher margin and then our earnings are so much stronger and they just didn’t think that they need to work. Well our position is that we grow our loans because we have good value proposition that differentiate our self from the others and as long as we do a good job and then 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.
And the other thing that I think is important for us is that. If you look at the last four to five years, our industry – our specialized industries verticals are a continuing evolving process obviously four years ago when we started entertaining business it was just the beginning. So the first year we have I mean just a very small origination but as of today we already have commitment that over the years and with the $600 million to $700 million outstanding balance and our private equity sector also started right around that time and have similar results.
We just started the energy business end of last year and first three months or so which we intentionally not trying to jump into the market to strong but this quarter the energy sector took the lead in terms of outstanding balance in the origination. So I mean each year, hopefully if we can identify one or two more new verticals that is relevant to our strategy and we build on it and we’ll continue to have more and more opportunities to provide loan growth. And so I mean because what we don’t want to do is a stress ourselves too much in too few – that come out of that products and then we’ll ultimately create concentration and one of the key things that we focus on in terms of risk over side and risk management is that we’ll continue to focus on diversified loan portfolio.
And if loan is getting to big we have to sell down, if loans get so big that no one wants it then we have to ask our self, the system wide loans that we want to keep and so I mean as long as we keep going in that direction we would not be hopefully taking too much of a hit, when it come to recession time. I think a good example is through commercial real estate.
We could have double digit growth in CRE easily we’ve done that in 2014 and 2015 there is no reason we can’t do the same thing in 2016. In fact many banks or 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 stay to have a very diversified mix in our loan portfolio. And that’s the reason why we’re always going to be managing things. May be it looks like a little bit too early than some of the folks see from the outside, but I think that it is for a good reason, because as long as we keep – that portfolio mix very diverse and at any particular moment any particular time there is always going to be one sector that may be in trouble. And what we want to do is that if they’re ever going to get unfortunately into having exposure in that one particular sector hopefully the dollar amount is not that big.
Okay I appreciate all thoughts here thanks.
Our next question comes from Michael Young of Suntrust Robinson Humphrey. Please go ahead.
Hi good morning.
Dominic I want to start off with just asking a big picture question on investment and may be expansion activities from here. I know you’ve been somewhat limited by the BSA/AML order, but as we kind of move through resolution of that end of this year next year are there certain expansionary activities that you had sort of in mind that you’d like to pursue in 2017?
Well in terms of 2017 I think that right now I looked at it is that, if anything of our expansion is basically sort of human capital, Greg Guyett is an expansion, Julianna is another expansion so just right here four of us. I mean we will have a 50% increase of new players so I like that though. I really enjoy bringing new people to have a very strong in in-depth experience that we didn’t have before. And that’s what East West is all about. We continue to evolve, we continue to grow and when we grew we looked at what we lacked and we add to it. And so we obviously if we looked at we right after we acquired United Commercial Bank we didn’t have any expertise in private equity, in life science, in oil & gas, in agriculture or in entertainment, et cetera, et cetera.
But we add those experience at 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. So in 2017 we’ll – I mean Greg and I will have plenty of discussion to explore what additional verticals that we can potentially capitalize on in the future. And so but it’s too early for us to sort of highlight anything specific. Most likely we are not going to do any brick and mortar type of acquisitions.
Okay. Great. Separately, I guess on the capital side, maybe a more moderate growth rate at kind of 6% to 8% on the loan growth side and more limited CRE growth so that you are well clear the 300% threshold. Do you have plans for may be 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 some day that we – I mean 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 how peers with our size, most of them have a lot of excess capital. So it would be somewhat similar 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 that will continue to interrupt our capital ratio.
Okay. Great, thanks.
[Operator Instructions] Our next question comes from Gary Tenner of D.A. Davidson. Please go ahead.
Thanks. Good morning.
Couple of quick questions. First, I wonder if you could just remind us kind of where your loan yields are by major loan segment in terms of commercial real estate, particularly and single-family residential?
Garry [indiscernible] you look at the loans we originated in the third quarter, so for C&I was around 4%, and then CRE about, I think recently 8% 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 were really kind of had a monopoly on this reduced stock loan program. So that is something that has continued to decline.
I want to highlight that if you look at CRE portfolios, quite different than many of our competitors here is that everything is adjustable. We have many of our clients who prefer fix 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 pears who actually have just put in the fixed rate with our hedges.
Okay thanks. And then Dominic, you talked a lot over the quarters about utilization rates on C&I loans and you made the point that they stabilize this quarter. Do you think there is anything in terms of any seasonal impacts on trade advance or anything that had that impact, or do you this is a sign of true stabilization?
I think that the answer is yes to both. I think that what happened just is that one is trade finance do tend to move up near the end of the third quarter and then throughout the whole fourth quarter until after Christmas. However, on a 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 the import. And so that’s why the seasonality makes a difference. We can predict a trend very well because it’s always slow down in the first quarter and then gradually inch up, and then sort of like 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. So when those specialized industry verticals have continued growing in size and the trade finance portfolio becomes smaller and smaller as a percentage to our overall C&I mix.
So if I look at where we are today, the 68% utilization I am seeing this – as I don't see a whole lot of upside right now at this point compared with let's say seven, eight years ago I said I am pretty much sure that C&I balance will grow up next year and then next quarter simply because that the seasonality. So I think that a 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 projected it at if this is where we are, the chances are there is a high likelihood in the fourth quarter with somewhat, in the similar level.
Okay thank you.
Our next question comes from Matthew Clark of Piper Jaffray. Please go ahead.
Hi good morning
Just curious if you sold any CRE loans in the quarter with the balance.
Not in the third quarter, only I mean the vast majority was sold in the first quarter and we have some remaining in the second quarter. The second quarter we sold 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 is kind of like one of those I would say it a emergency test than just to see how quick we can turn around and sell down loans and we did that.
Then there is some residual that we ended up selling in April. So and that’s what happened to first and second quarter but then in the third quarter we did not have any loan sell for CRE.
And then in terms of your core expense getting I think for the fourth quarter being comparable to the third of the $136 million, ex that tax credit, how should we think about that run rate in 2017?
Can you repeat the question again I just I didn’t hear it.
Sure just thinking about your core expense guidance for the forth quarter being comparable the 3Q of 136 million just curious how we should think about that run rate in 2017?
Okay so 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 are going to probably have like a slightly more headcounts payable expenses and then which will offset against these elevated BSA compliance cost for 2016 and net net we will properly come out flat, so that’s what we looking at this point.
And you talking about flat with the fourth quarter are you talking about flat with the core expenses in 2016?
Flat with 2016. Am I correct?
Take a look Matt, there is no difference really.
Got it yes okay and then last one just in terms of the tax credit investments as we look in to 2018 I know it’s away from – from now but just curious if it is fair to assume a similar amount of investments in related amortization in 2018 for now?
Matt 2018 is pretty for and advanced for right now we would look out what kind of opportunities are there and relate to function as return relatives of risk and how comfortable we are so it’s a little bit early to have comment on that.
Fair enough thanks.
[Operator Instructions] Our next question comes from Chris McGratty of KBW. Please go ahead.
Good morning, thanks for taking the question.
Good morning Dominic. The fee income trends were particularly strong in the quarter, you called them out in the release a bit. Wondering if you could further elaborate on perhaps the strategies you are implementing and the sustainability into the next few quarters.
Yes in fact we are working hard at it, we looked at you know again I think from foreign exchange and then, we this quarter I think we were doing quite well the swaps. You know interest rates starts spiking up much higher than I think that the opportunity to swap would obviously diminish. But the good news is that we will make – the NIM will come back much stronger and we will offset against that.
But then 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 US-China elements, the more likely we have additional international clients that we more foreign exchange business. And the entertainment sector is a good example.
Most of our studios in the United States actually do worldwide distribution have a lot of foreign income coming in. So therefore I think that the opportunity for us whether it is in the entertainment space or some of these like for example like life science or technology companies, they all have foreign receivables, 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 would expect to get more fee income for the trade finance fees. One of the areas we had not done as well is the EXIM bank because of the challenge in Washington, D.C.
Now I don’t know what is going to happen in the first week of November, have the election but hopefully sometime next year the EXIM banks are getting back into real business and that would help to increase more fee income. And wealth management we have every intention to grow it one step at a time. So we figure our that there are enough areas out there that will help us to sustain consistent growth and we are going to continue to keep looking on it.
Great very helpful. If I could ask a follow-up pm 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 of a proportion or 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 are not going to emphasize too much on asset growth and I think that the growth that we are focusing on in the next year or two is a high quality loan growth, high quality deposit growth. So as you have seen in our deposit side, we continue to focus on changing the mix and I think we have done really well from 2009, after the acquisition of United Commercial Bank we had so many CE customers and so we had now converted to 80% of our deposit are core deposits and 33% of our deposit are noninterest-bearing demand deposits. So these are kind of like directions that we are focusing on. Now, while we are continuing to changing the mix, we also get some nice growth, too.
Whatever growth we get we get. And the same thing for the deposits. No. The same thing for the loans. As long as we get good high quality loans that keep coming in if that means we will inch up the asset size so be it. But we are not going to grow assets just for the sake of growing assets.
So just any loan growth I mean the earning asset growth will probably grow to slower rate than the loan is kind of the...
That's correct because – that's correct because we have rooms from a liquidity point of view from a loan to deposit point of view so there is more likelihood that we will continue to – if we grow more loans we don't have to grow the asset and you have sort of like seem that in fact the last two quarters.
Great, thanks for taking the question.
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.
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