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East West Bancorp Inc (EWBC) Q3 2018 Earnings Conference Call Transcript

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East West Bancorp Inc  (NASDAQ: EWBC)
Q3 2018 Earnings Conference Call
Oct. 18, 2018, 11:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to the East West Bancorp Third Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) And please note that today's event is being recorded.

I would now like to turn the conference over to Julianna Balicka, Director of Strategy and Corporate Development. Please go ahead.

Julianna Balicka -- Director of Strategy and Corporate Development

Thank you, William. Good morning and thank you, everyone, for joining us to review the financial results of East West Bancorp for the third quarter of 2018.

With me on this conference call today are Dominic Ng, our Chairman and Chief Executive Officer; and Irene Oh, our Chief Financial Officer.

We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may differ maturely from actual results due to a number of risks and uncertainties. For a more detailed description of the risk factors that could affect the company's operating results, please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2017.

In addition, some of the numbers referenced on this call pertain to adjusted numbers. Please refer to our third quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures.

During the course of this call, we will be referencing a slide deck that is available as part of the webcast and on the Investor Relations site. As a reminder, today's call is being recorded and will be also available in replay format on our Investor Relations website. During the Q&A, we ask that you limit your questions to two.

I will now turn the call over to Dominic.

Dominic Ng -- Chairman and Chief Executive Officer

Thank you, Julianna. Good morning and thank you, everyone, for joining us for our call. I will begin our discussions with the summary of results on slide three. This morning, we reported third quarter 2018 earnings of $171 million, or $1.17 per diluted share, compared to $172 million, or $1.18 for the second quarter of 2018; year-over-year our earnings are up 29% from $133 million, or $0.91.

Quarter-over-quarter, our net interest income grew by 2%, reaching a record $349 million in Q3. Our third quarter net interest margin was 3.76% and our efficiency ratio was 39.9%.

Asset quality remained relatively stable. Our non-performing assets totaled $115 million, or just 0.29% of total assets and quarterly net interest -- net charge-offs were 5 basis points of average loans.

Now, turning to slide four. You can see that our third quarter return on assets was 1.76%, return on equity was 16.2% and return on tangible equity was 18.5%. Our profitability ratios are consistently attractive.

Our five-quarter range ROA has been 1.35% to 1.84%. For ROE has been 13% to 17% and tangible ROE has been 15.1% and 19.7%. We are on track to deliver another strong year in 2018, characterized by robust year-over-year loan growth, strong net interest income growth, and expanding full year net interest margin, controlled expense growth, attractive efficiency and stable asset quality.

As Irene will discuss in more detail in our guidance for the full year, we are leaving our loan growth and margin expectations unchanged, and are reducing our provision expenses forecast. Looking toward 2019 and beyond, I am excited about the opportunity for East West to win new business and deepen our existing client relationships. Geopolitical disruption between US and China is providing additional opportunities to East West, with our cross-border positioning and capabilities, to be a valued partner for clients and provide financing and banking services necessary to help them navigate and adjust to the changing environment.

As we call on our clients to discuss trade, tariffs and impact to their business, we are seeing a strong need for our knowledge and services. The value-add that East West brings to the table is greater than ever.

Yes, at the macro level, tensions between the US and China have led to a drop in Chinese direct foreign investment in the United States. However, at our current size, East West is still small enough and have plenty of rooms to grow market share, even with a drop in Chinese investments. For example, by calling all subsidiaries of Chinese companies already operating in the United States. Most importantly, this was just nimble and can act quickly to take advantage of the opportunities created out of this disruption. Although, US-based banks may be pulling back from clients who have business related to China to us, this is our wheelhouse, understanding both markets to capitalize on this understood risk.

For the past few years, we have been making investment in our cross-border banking capabilities, adding dealership in our Greater China region, expanding our cross-border front-line team, upgrading our systems, enhancing our product capabilities and improving the customer experience. Today, we are well-positioned to benefit from these investments. I feel confident that we are well-positioned to execute and help our customers thrive in this new environment, and increasing our cross-border banking activities in the coming year.

Furthermore, over the last few years, we have continued to invest in technology and our product capabilities to meet customer expectation throughout the Bank, including in our cash management products and capabilities. In the early 2019, we will be introducing more digital capabilities on our deposit platforms for both commercial and consumer clusters. We expect these enhancements will be instrumental in expanding our core deposit relationships in the coming years.

And now, moving on to a discussion of this quarter's loans and deposit growth on slide number five and six. As of September 30, 2018, total loans reached a record $31.2 billion, growing by $968 million, or 13% linked quarter annualized from June 30, 2018. In the third quarter, average loans of $30.5 billion grew by 11% linked quarter annualized. Our strongest growth in the third quarter was in single-family mortgage, which were up by $393 million based on quarterly average balance, or 31% annualized, followed by commercial and industrial loans, which were up by $380 million based on quarterly average balances or 14% annualized.

This quarter, we saw a strong performance in our energy and entertainment verticals. We also had a strong quarter-over-quarter loan commitments increase in private equity sector, which drove growth in fund assets for their portfolio. Overall, the growth in specialized commercial, industrial verticals outpaced growth of total loan -- commercial, industrial loans in the third quarter of 2018.

In the third quarter, commercial real estate, including multi-family and construction and land loans grew by 5% linked quarter annualized based on average balance. As we have previously stated, given competition on both pricing and structure and with current valuation, we continue to be comfortable with slower growth across our commercial real estate portfolio.

On slide six, you can see that total deposits grew $853 million, or 10% annualized to a record $33.6 billion as of September 30. Our loan-to-deposit ratio as of September 30 was 92.8% compared to 92.3% three months ago. Our third quarter average deposits of $33.2 billion grew by 11% linked quarter annualized.

By category, on an average basis, we saw growth in CDs and interest-bearing checking deposits this quarter. Our CD growth reflects the success of our retail branch-driven spring and summer deposit campaigns.

And now, I will turn the call over to Irene for more detailed discussions of our income statement and outlook.

Irene Oh -- Executive Vice President and Chief Financial Officer

Thank you, Dominic. On page seven, we have a slide that shows the summary income statement, a snapshot of the key items, including tax related items. I'll skip the summary and dive right into the details on slide eight. Third quarter net interest income of $349 million, increased by 2% linked quarter, driven by a combination of our robust loan growth and expanding loan yield, partially offset by growth in time deposits, and an increase in deposit costs.

It was a record quarter of net interest income for East West, year-over-year, our net interest income grew by 15%. Strong revenue growth is a consistent hallmark of East West financial performance.

GAAP net interest margin of 3.76% decreased by 7 basis points and excluding the impact of accretion, the adjusted net interest margin of 3.72% was down by 4 basis points from the previous quarter. The drivers of the 7 basis point change in the GAAP margin for the third quarter are as follows: a 10 basis point increase from higher loan yield offset by a 3 basis point decrease due to a decline in ASC 310-30 discount accretion income, and a 1 basis point decrease from a shift in the asset mix. Additionally, an 11 basis point decrease due to higher rates paid on deposits and a 2 basis point decrease from a shift in the funding mix. Although, the loan growth for the third quarter was strong, it did occur in the latter part of the quarter, resulting in higher average balances of lower yielding early [ph] assets during the quarter, which impacted the net interest margin by approximately 2 basis points.

The increase in loan yields this quarter is attributable to the continued pricing of our loan portfolio, following interest rate increases in the second quarter as the Fed funds rate did not increase until late in the third quarter and the one month LIBOR rate did not move significantly ahead of this rate increase.

The late quarter move in interest rates in the third quarter implies favorable momentum for our loan yields repricing for the fourth quarter, which is why we are comfortable maintaining our net interest margin guidance of 3.75% ex accretion.

The increase in deposit costs this quarter largely reflects the summer CD campaign and the impact of a full quarter of our spring CD campaign. Additionally, the increased deposit rates which were raised in the latter half of the second quarter. On a end-of-period basis, the biggest increase in our deposit cost was in the second quarter and in the third quarter, this increase moderated. As of September 30, the end-of-period cost of our total deposits was 0.83%, up by 11 basis points from 0.72% as of June 30. For comparison, the quarter-over-quarter increase as of June 30, 2018 was 19 basis points. Similarly, the end-of-period cost of interest-bearing deposits was 1.22% as of September 30, up 15 basis points from 1.07% as of June 30, which was up by 25 basis points from March 31.

FICO [ph] to date, since the Federal Reserve started increasing the Fed funds rate in December 2015, we had an implied beta at 55% on our loan yields, excluding ASC 310-30 accretion and 28% on our total deposit costs. Again, relative to the change in the average Fed funds rate. For the full year, our outlook is for net interest margin excluding ASC 310-30 accretion of 3.75%. This implies all else equal and expanding margin in the fourth quarter benefiting from continued asset sensitivity of our loan portfolio to increasing interest rates and from more moderate increases in deposit costs.

Now, turning to slide nine, total non-interest income in the third quarter was $46.5 million compared to $48 million in the prior quarter. Excluding the impact from gains on sales, total third quarter non-interest income was $42 million compared to $45 million in the prior quarter. Customer-driven fee income for the second quarter was 37 million, a decrease of 8% from both the second quarter and the year-ago quarter. An increase in loan fees was more than offset by decreases in customer-driven fees from derivatives, letters of credit and wealth management.

Moving on slide 10, third quarter non-interest expense was $180 million and our adjusted non-interest expense, excluding amortization of tax credit investments and core deposit intangibles was $158 million, a slight increase from $156 million in the second quarter. The linked quarter increase was driven by higher compensation and employee benefit costs, partially offset by lower consulting and legal expenses.

Our third quarter adjusted efficiency ratio was stable at 39.9% compared to the second quarter as our revenue and expense growth were in line during the quarter. Our operating efficiency were for [ph] East West long track record of prudent expense management in the context of revenue growth, while making investments to strengthen our risk management and capabilities and improve our customer experience.

Our third quarter 2018 pre-tax, pre-provision income of $238 million grew by 1% quarter-over-quarter and our pre-tax, pre-provision profitability ratio was 2.44%. Year-over-year, our pre-tax, pre-provision income is up by 13% and our pre-tax, pre-provision profitability has expanded by 12 basis points.

In slide 11 of the presentation, we detailed our critical asset quality metrics. Our allowance for loan losses totaled $310 million as of September 30, or 0.99% of loans held for investment compared to 1% as of June 30, 2018, and as of September 30, 2017.

Non-performing assets of $115 million as of September 30 increased from $104 million as of June 30, and decreased from $117 million as of September 30, 2017. Non-performing assets were equal to 29 basis points of total assets at the end of the third quarter compared to 27 basis points at the end of the previous quarter and 32 basis points at the end of the prior year quarter.

For the third quarter of 2018, net charge-offs were $4 million, or 5 basis points of average loans annualized. This compares to 11 basis points of average loan with year-to-date in 2018 and 9 basis points with the full-year 2017.

The provision for credit losses recorded in this quarter was $11 million compared to $16 million for the second quarter of 2018 and $13 million for the third quarter of 2017, as we continue to record provision for the new loans we are originating.

Moving to capital ratios on slide 12. East West capital ratios remain strong. Tangible equity per share of $25.91 as of September 30, 2018 grew 4% linked quarter and grew by 14% year-over-year. Our regulatory capital ratios increased by 84 basis points to 89 basis points year-to-date.

Our capital ratios increase, common dividend payouts and organic balance sheet growth are supported through organic earnings generations. As noted by Dominic and announced in our earnings release earlier today, East West Board of Directors has declared fourth quarter 2018 dividends for the common stock. The common stock cash dividend of $0.23 per share is payable on November 15, 2018 to stockholders of record on November 1, 2018.

And with that, I'll move on to reviewing our updated 2018 outlook on slide 13. For the full year, we continue to expect loan growth will be approximately 10% unchanged from our previous outlook. We continue to expect full year net interest margin, including discount accretion to be approximately 3.75%.

In terms of changes to our outlook, we are lowering our provision expense expectations to $60 million to $65 million for the full year, down from a range of $70 million to $80 million previously. We are also narrowing our operating expense growth outlook to approximately 9% for the full year. Lastly, we now anticipate that the full year effective tax rate will be 14%.

With that, I'll now turn the call back to Dominic for closing remarks.

Dominic Ng -- Chairman and Chief Executive Officer

Thank you, Irene. In summary, we had a solid third quarter of 2018 and are on track for another record earnings year. I'm confident in the growing demand for our cross-border banking services and knowledge of both markets, and backdrop of strong revenue give us resources to invest in improving our customer experience and strengthen our product capabilities, positioning us to take advantage of opportunities during periods of disruption. Year-after-year our goals are to drive sustainable growth and deliver attractive profitability for our shareholders, and that is reflected in our financial performance.

I will now open the call to questions. Operator?

Questions and Answers:

Operator

Thank you. And we will now begin the question-and-answer session. (Operator Instructions) And our first questioner today will be Ebrahim Poonawala with Bank of America Merrill Lynch. Please go ahead.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Good morning, guys.

Dominic Ng -- Chairman and Chief Executive Officer

Good morning.

Irene Oh -- Executive Vice President and Chief Financial Officer

Good morning.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Yeah. I guess, first question, Dominic, you touched upon the sort of market share opportunities for the Bank, and it seems like you can grow loans at whatever rate you want to depending on your appetite and if you find good sort of risk-adjusted returns. As we think about next year in terms of loan growth, like can you talk about sort of the opportunity in terms of do you feel even better on the commercial, C&I and residential mortgage side to be able to sustain this level of growth?

Dominic Ng -- Chairman and Chief Executive Officer

Well, for the residential mortgages, we have been success for several years now, consistently, find ability to have a very nice robust growth. And I think it's a combination that our niche product has been working really well. And again, not having too many competitions out there in the market that originated loans in the demographics that we focus on. And in addition to that, our team has gotten better and better internally that the service level have got to the point that -- interesting for -- it's been a few years now that we did not do any type of advertising or marketing on the single-family mortgages, but there are more and more business coming through, through the branch referral or clients refer their friends. So I expect that in 2019 we will still going to have some pretty decent growth in that sector.

On the C&I side, what you find is that, we have enough diversification there in different industry verticals that I think that may be one quarter, like for example, this quarter, energy and entertainment step up, couple of quarters ago our entertainment sector was not doing -- going as well but then -- it's not coming back and private equity capital call line was not as strong, maybe a quarter ago and now coming strong. And so, different quarters going to have different vertical, the step up but they kind of average out. But I still feel that there is going to have -- we're going to have plenty of opportunities there.

But more importantly, because of the current US-China tariff situation and I think that our cross-border team would have plenty of opportunities to flex their muscle to really demonstrate our value proposition in terms of understanding the business and finding optimal solutions for existing customers and also prospective customers. So from that angle, I would say that, we are pretty confident that we should have a pretty nice growth opportunities in 2019 and beyond.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

That's helpful. And, I guess, switching to capital TCE at 9.73%, given your return outlook you're going to build a lot of capital. Can you talk about in terms of one, is there a target around the dividend payout where you would look to get to? And are you OK just building capital for now and given some of this late cycle concerns where you'd rather have excess capital?

Dominic Ng -- Chairman and Chief Executive Officer

We have always -- no, as we stated before, I mean, East West would always shareholders-friendly. And we always have this discussion about dividends or even share buyback with our Board and then these are always discussion that we are sort of like -- so an exercise that we always go through with our Board to make sure that we are doing the right thing for our shareholders.

Now, I do wanted to highlight one fact is that, East West Bank, while we have record earnings every single year for many years now. We usually make our best return during the recession or financial crisis time. So, if you look back, I recall like in 1991 we made a very good deal through the RTC and then in 1992 the same thing, and 2009, our take over of the United Commercial Bank, those are the times that really are transformational sort of opportunity for East West Bank.

So my view is that, we never wanted to just look in a very short time horizon type of earning per share increase for marginal differences. I mean, the reason I can say that is because we're having some very strong return of equity, return of assets, and our profitability is really high, our net interest income continue to grow, loan having this double-digit kind of organic growth. So, we're in a pretty good shape by now.

I wanted to make sure that we have a little bit more cushion in the capital, because I think that we can afford to have a little bit more cushion in the capital still generate substantially better return than many of the peer banks. From that regard, I would say that, in case -- just in case, I don't wish for any sort of like a slowdown in economy or, I mean, a recession anything like that, but in case something happen, we'll be in a much better position to strike, than where we are today when everything seems to price at the top level.

So with that regard, I would say that -- I just kind of give you some when we have discussion with the Board, normally the discussion you have about these kind of like opportunity cost, the cost benefit and et cetera, and that's why we come to conclusion. But there is no question in our mind when we feel that if the profitability -- I mean, well, obviously, continue to stay so strong and if there is any reason that we feel that we may not be able to fully utilize the capital in the next foreseeable future and then we, obviously, both on increasing dividends and even if the stock price looks very attractive buyback is all different options will be considered.

However, at this stage right now, I would say that, we generally have a bias to stock up a little bit more capital for that just in case in the future because those opportunities that we experienced for the last two decades has been extraordinary beneficial for the long-term growth of East West Bank and we do not want to be in a position that when it come to that time, someday, that we end up sitting on the sideline.

Operator

And our next questioner today will be Jared Shaw with Wells Fargo Securities. Please go ahead with your question.

Jared Shaw -- Wells Fargo Securities -- Analyst

Hi, good morning.

Irene Oh -- Executive Vice President and Chief Financial Officer

Good morning, Jared.

Jared Shaw -- Wells Fargo Securities -- Analyst

On the CD promotions that you had run, I guess, first, is that done now? And then also, were those single product CDs that you basically had coming in or is that developing deposit relationship and should we expect to see some growth in core deposits on the heels of that?

Dominic Ng -- Chairman and Chief Executive Officer

We've completed the campaign. So I've said few weeks ago that we completed campaign and this was a very good campaign, not only we took care many of the existing customers and we used the campaign -- the CD campaign to ask more core deposit from our customers. In addition to that, we have quite a few new customers that we brought in. And with these new customers, of course, when they first came in it was because of the attraction of the CD, but now we are calling these existing -- these new customers for the opportunity to offer them other deposits and other fee services and so forth. So, we are -- I mean, the branches are very excited, very excited that they were given these opportunities to bring in additional customers.

Jared Shaw -- Wells Fargo Securities -- Analyst

And then are you looking to try to at this point the rate cycle moderate asset sensitivity bringing in these CDs, obviously, the duration of the liabilities, are you looking to try to moderate that asset sensitivity or what are your views in terms of balance sheet positioning going out through the next year?

Irene Oh -- Executive Vice President and Chief Financial Officer

Yeah. I think that's a great question, Jared. I don't think that the CD campaigns is really a deliberate strategy to moderate our asset sensitivity. We are still quite asset sensitive from the loan side. We have $11 billion of our loans are tied to LIBOR, another $11 billion tied to (inaudible), a lot of that reprices. And given where the yield curve is, I think this is still the right strategy for us.

The CD campaign, as Dominic alluded to, we wanted to make sure that our retail branches we invigorated. This is also with the rising Fed funds rate, where the market is, so we wanted to make sure, quite frankly, that they had enough ability to go out there and compete with kind of other things out there.

Operator

And our next questioner today will be Aaron Deer with Sandler O'Neil and Partners. Please go ahead.

Aaron Deer -- Sandler O'Neil and Partners -- Analyst

Hi, good morning, everyone.

Irene Oh -- Executive Vice President and Chief Financial Officer

Good morning, Aaron.

Dominic Ng -- Chairman and Chief Executive Officer

Good morning.

Aaron Deer -- Sandler O'Neil and Partners -- Analyst

I guess, I was following up on the asset sensitivity question there. It was encouraging to see your margin guidance as you look into the fourth quarter, just given some of the near-term balance sheet trends and expectations. But as we look out to next year, obviously, we've seen deposit beta has accelerate really just more over the past couple of quarters. And if that trend continues, notwithstanding some of your current liquidity that you brought in. What does that mean for your margin going forward? Can we continue to see some good expansion we've seen year-over-year or is that going to be a more moderate level?

Irene Oh -- Executive Vice President and Chief Financial Officer

Yeah. Great question, and maybe the critical question for this call. With the guidance that we have, certainly the fourth quarter we do expect the net interest margin to increase, partially because of the asset sensitivity and the impact to or the loans with the rising rates. And then also, as we kind of tried to highlight in the prepared remarks, we do expect the cost of deposits increase to moderate.

At this point in time, Aaron, it's a little early to talk about 2019. We'll continue to do our analysis and give an updated kind of more specific feedback on what we think about 2019 with the earnings call in January. But at this point in time, I would say, our expectations are that the rate of the increase in the cost of deposit that would moderate and then also related to that, that we do expect year-over-year the net interest margin to increase.

Aaron Deer -- Sandler O'Neil and Partners -- Analyst

Okay. Very good. Thank you. And then, I'm just curious, walk through some of the different specialty categories within the C&I book. What amount of commercial loans currently are related directly to trade finance?

Irene Oh -- Executive Vice President and Chief Financial Officer

Trade finance loans, if you look at our C&I loan, it's roughly from an outstanding balance perspective, it's about $1.7 billion related to wholesale trade.

Operator

And our next questioner today will be Chris McGratty with KBW. Please go ahead.

Christopher McGratty -- KBW -- Analyst

Hi, good morning. Thanks for taking the question. Maybe just a question on credit spreads, any changes that you've noticed in credit spreads year-to-date, not if maybe from the give back of tax -- some of the tax benefit? Any kind of commentary on credit spreads relative to maybe where they were six to nine months ago?

Irene Oh -- Executive Vice President and Chief Financial Officer

Yeah. I don't know if we've seen substantial changes from six to nine months ago. Certainly, in certain asset class categories, such as CRE, we've talked about that as far as where prices are and also kind of a function of kind of where rates are. We want to be careful about kind of growing that at kind of a lower price. But I don't know substantially we've seen tightening, let's say, in the last quarter or so.

Christopher McGratty -- KBW -- Analyst

Okay. And maybe, while have you -- deposit rates at the end of the quarter, did you have that data point, obviously, the full quarter? Did you have where the spot rate was at September quarter?

Irene Oh -- Executive Vice President and Chief Financial Officer

Yes. Our end-of-period cost of deposits was 83 basis points.

Operator

And our next questioner today will be Matthew Clark with Piper Jaffray. Please go ahead.

Matthew Clark -- Piper Jaffray -- Analyst

Hey, good morning.

Irene Oh -- Executive Vice President and Chief Financial Officer

Good morning.

Matthew Clark -- Piper Jaffray -- Analyst

Just the first one on FDIC -- potential relief and FDIC insurance costs, any estimate of what do you think that might be for next year?

Irene Oh -- Executive Vice President and Chief Financial Officer

I think at this point in time, although it is estimated, we think the run rate for the year will be probably roughly $12 million or so.

Matthew Clark -- Piper Jaffray -- Analyst

Okay. And then on the adjusted efficiency ratio, I guess, what are your thoughts on the sustainability of that 40% given your growth prospects and expectation for NIM expansion next year?

Irene Oh -- Executive Vice President and Chief Financial Officer

I think the math on that will just kind of flush out, Matthew. So given where we're at right now, we expect efficiency ratio to be roughly the same.

Operator

And our next questioner today will be Michael Young with SunTrust. Please go ahead.

Michael Young -- SunTrust Robinson -- Analyst

Hey, good morning.

Irene Oh -- Executive Vice President and Chief Financial Officer

Good morning.

Michael Young -- SunTrust Robinson -- Analyst

Wanted to ask the expense question may be another way. I know you guys have highlighted a lot of the sort of technology and new initiatives that you've been putting in place and investing in there this year. Maybe if we could just get an overview of kind of where we are, what inning we're in in that process, and maybe how much of that is left to come maybe next year?

Dominic Ng -- Chairman and Chief Executive Officer

Well, we have several different areas that we -- I think that we've been investing for the last few years. I mean, the first category is actually just human resources. For the last four to five years we continued -- we have continued to bring in experienced hires and to complement with our homegrown legacies executives and managers and officers and so forth. So that we have continued to do that in the last few years. And I would expect that that in 2019 we may not have as much of a growth because we have pretty much staff up well in terms of the people that we need in that regard.

Then we also have expenses in terms of building up our internal capability and infrastructure, some risk enterprise, risk management area from technology area, I think particularly in the digital technology area is an area that I expected that both consumer digital and commercial digital platform that we are building and we will still have expenses, obviously, that -- well, I should say that investments that we need to put in to continue that development. And it is not only that we are excited about in 2019 that we will most likely have some very nice product to launch, but more importantly, we will continue to support that endeavors because in the long run this will reap substantial benefit for East West Bank.

So, on the enterprise risk management and then something like to internal risk oversight type of build out, I think that we are in pretty good shape. So the cost -- the additional cost that going forward, I think the additional expenses growth should be substantially less than what we have built for the last few years. So in that standpoint, I would say, all in all, what I'm looking at right now is that, the technology sign, the digital technology side you probably see that similar kind of like expense growth. But then, in terms of adding additional human resources and adding additional infrastructure build for these risk oversight areas, probably the expense growth would be less. Net-net, I would expect that the expense growth in 2019 and beyond would most likely be less than the current run rate.

Michael Young -- SunTrust Robinson -- Analyst

Okay, great. That's helpful. And last question, just on the single-family residential. Some of the concerns that you've expressed on commercial real estate, I would assume are somewhat here could be extrapolated to the single-family portfolio as well. So maybe just if you could give us an understanding of the comfort there going forward and growing that book at a fast pace?

Dominic Ng -- Chairman and Chief Executive Officer

When you say extrapolate, can you just expand a little bit? So I can --

Michael Young -- SunTrust Robinson -- Analyst

Well, you've commented on cap rates being low for commercial real estate and just prices increasing so much due to cycle that you guys wanted to decelerate growth there. Single-family I think has experienced some similar trends and pricing et cetera. So just curious why are you so comfortable with that portfolio?

Dominic Ng -- Chairman and Chief Executive Officer

Well, I think that it's a bit different in that. So on the CRE side that we -- while we have a very strong market share in the Asian American community, we also actually have quite a bit of business with the mainstream market, which we have to compete covenant pricing with everybody else throughout the country.

When it comes to single-family mortgages, our primary production has been within the Chinese-American market. And as of today, this 50% loan-to-value single-family mortgage is quite unusual comparing with most of the other banks that are originating single-family mortgages. So in that standpoint, from a credit risk standpoint, obviously, it's not much of a concern at all and then we have 40-some-odd years of history doing the same thing and never had any problem. That's one.

Secondly, I'll be the one that will share with you today, if you ever go back to transcript of the earnings call, every single year, I will say that I don't expect that single-family mortgage will be able to grow like the kind of volume that we had, I've been talking about this in the last few years. And I was wrong every year. It's just like my prediction of interest rate would eventually rise several years ago and I was wrong on that too. But eventually it may become true, but I would say this, is that, what I found why I was wrong, the last few years is that, we simply are not that big. I'm talking about East West Bank, it's not big enough to completely dominate the entire market to actually be impacted by what the volume of real estate transaction, single-family home real estate transaction throughout the country. We are not big enough.

So if we continue to perform and provide great services and getting the real estate agents, getting our customers so happy with the services that we provide that we are so reliable of closing these mortgages on a timely manner, I think that that sort of goodwill and the brand with all the referrals that coming to us allow us to continue to take out additional market share. And that's the only thing I can explain because we know that single-family mortgage market really, really well in the areas that we conduct our business and we do not see single-family transactions in these neighborhoods that have increased. In fact, if anything some of the neighborhoods actually decreased the volume of transactions, but somehow East West continued to find ways to grow our mortgage origination. I think it has to do with, because we are actually getting more referrals, some other banks are getting less and we're getting more.

Operator

And our next questioner today will be Lana Chan with BMO Capital Markets. Please go ahead.

Lana Chan -- BMO Capital Markets -- Analyst

Thanks, good morning. One question around deposit growth, your loan-to-deposit ratios getting toward the upper end of the range that I think you said that you were comfortable with the 93%. Should we expect another CD campaign shortly, or is it not likely until next year? And then, did you say before that the fourth quarter margin assumption assumes that the deposit costs increase moderate?

Irene Oh -- Executive Vice President and Chief Financial Officer

Lana, that's correct. This is Irene. We do expect that the deposit cost will moderate in the -- the increase in deposit cost, excuse me, will moderate in the fourth quarter. And in the prepared remarks, we talked about kind of point over point what the cost of deposits were as of the end of September, 83 basis point, up a 11 basis points from 72 as of June 30. And so, if you look at that as well the increase point to point has decreased. And that makes sense.

Lana Chan -- BMO Capital Markets -- Analyst

Okay. And about this CD need for funding. Is that more likely next year or (multiple speakers)?

Irene Oh -- Executive Vice President and Chief Financial Officer

No plans for the fourth quarter.

Lana Chan -- BMO Capital Markets -- Analyst

Okay. And then also could you give sort of the rates on the yields on the resi mortgage loan, just looking at that relative to the core loan yield of 4.97%, is it still accretive?

Irene Oh -- Executive Vice President and Chief Financial Officer

Yeah. So for the resi mortgages that we are -- our rate sheet right now for five year, no points or 5 in a quarter. One other thing I'll maybe highlight we also introduced a few months ago, we introduced a 30-year fixed mortgage product, given kind of where rates are and the needs of our customers. So the rates on that for the 30-year fix is 5.75%.

Operator

And the next questioner today will be Dave Rochester with Deutsche Bank. Please go ahead.

David Rochester -- Deutsche Bank -- Analyst

Hey, good morning, guys.

Irene Oh -- Executive Vice President and Chief Financial Officer

Good morning.

Dominic Ng -- Chairman and Chief Executive Officer

Good morning.

David Rochester -- Deutsche Bank -- Analyst

Just had a quick follow-up on your expense growth commentary. It seems like if some of the drivers of expense growth this year are sort of shrinking next year and then you have $12 million in savings or so from the FDIC surcharge rolling off. It just seems like expense growth could actually come in decently next year. Are you thinking that maybe like the mid-single-digit pace for that is more appropriate at this point for next year?

Dominic Ng -- Chairman and Chief Executive Officer

We will definitely give you a more narrowband guidance in January, which is what we -- because we are working on the budget, but I would say that right now based on what we've seen, your assumption looks very, very reasonable.

David Rochester -- Deutsche Bank -- Analyst

Okay. And then just one quick one on the NIM. Just wanted to drill into a component of that being your security strategy. It just seems like the yields on the shorter-term investments in securities seem fairly low. So I was just curious as to what you're buying there today. And just given the uptick in the curve, are you guys thinking at all about shifting the strategy at all to take advantage some of the higher rates out there?

Irene Oh -- Executive Vice President and Chief Financial Officer

Yeah. That's a great question. We have continued to kind of increase the duration of our securities book, so as a reference point, as of the end of the quarter, the duration was 4.6 compared to 4.22 as of June 30. Obviously, the increase in duration is partially because of the uptick in the yield curve, but it's also because we are purchasing securities with longer duration during the quarter. We bought more securities with average duration of 5 plus and some of the loans are -- excuse me, securities that we sold are matured were lower duration. So that's something gradually we do expect to kind of change. And as I mentioned earlier, we are also originating 30-year fixed loans as well, given kind of where rates are with our asset sensitivity.

Operator

And our next questioner today will be Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner -- D.A. Davidson -- Analyst

Thanks. Good morning.

Irene Oh -- Executive Vice President and Chief Financial Officer

Good morning, Gary.

Gary Tenner -- D.A. Davidson -- Analyst

Hey. I think you had highlighted the trade finance portfolio at about $1.7 billion. Can you talk about whether you've seen any sort of identifiable impact in the third quarter or early in the fourth quarter from the trade -- or from the tariff disputes or the trade disputes, any change in your customer behavior at this point?

Dominic Ng -- Chairman and Chief Executive Officer

Well, of course, many of our customers actually are -- yeah, in fact, they are actively looking at the potential trade -- and some of them -- a few of them already got hit with 10%. And then -- but many of them are preparing for the 25 -- I mean, the potential 25% come January of 2019. We all have to prepare for the worst case scenario. And that's why our team actually use this opportunity to go on and do these clients call. I mean, because sometimes without these kind of like challenges, bankers knocking on doors and calling on customers, sometimes it can be a little bit of a distraction to a customer focusing on running the day-to-day business.

But in today's environment, our customers very, very interest to welcome us visiting and then that allow us to have the opportunity to take a deep dive and understanding our client situation better, and then we can share ideas, and we have many examples that we -- recently we have a few clients that actually exporting goods from China to United States and they have been working closely with the retailers in US and compromises that clients in China is going to take some reduction in their margin, and the US retailer would also do the same thing, and the difference is going to go to the consumers, and that is the game plan is that in case of worst case scenario that 25% tariff is going to come in, and they're going to just go with that plan.

And you know what, we looked at it with the Chinese Government providing tax relief for these type of exporters, and then despite the fact that they are reducing the margin a bit, is not like that they're taking on the entire 25% on their own, because the US retailer take on some, the US consumer would have to take on some, and they would take on some and then they got offset by some of these tax relief from the Chinese Government, net-net, it's not that big of a deal. But the difference is that, we at East West Bank spend the time and understand that and work with these different scenarios, do the stress test, we feel that this specific customers actually can grow volume despite that the margin decrease, but it can use volume to offset the margin reduction and come up with even more profitability.

And so, customer like that, we are confident that as long as they execute according to the right plan, we actually can support them to help them to grow even more instead of like most of the US banks that if they have a fear something about, well, anything US-China related, they just wanted to back off and derisk themselves. And those -- for those customers, for those business that have the banks that don't understand them that would derisk away from them, they're going to have to go find banks like East West to understand this business and understand how to manage that risk. So we feel that there are opportunities there like this, we have other opportunities such as customers actually just for one or two specific products that can easily outsource to Thailand, Indonesia, Malaysia, and they went ahead and started doing that outsourcing in other regions. So, for those customers who can easily outsource, they did outsource, for those actually the supply chain is too complicated, the infrastructure is too sophisticated that they cannot move around, they just going to have to just like hunger down and then do compromise with the US retailers and so forth.

And then, obviously, we have other clients who set up their manufacturing base in US and that we are helping them. For those that who said that, you know what, we don't want to deal with this uncertainty of tariffs, we've got to make sure that we set up shops in US and then we are doing the financing for the equipment, they put into their facilities and we are financing some of them for the real estates that they acquire in US. So step by step, we just think that different kind of challenges, different kind of opportunities and that's what we're working on right now.

Gary Tenner -- D.A. Davidson -- Analyst

Great. Thank you, Dominic.

Operator

And our next questioner today will be David Chiaverini with Wedbush Securities. Please go ahead.

David Chiaverini -- Wedbush Securities -- Analyst

Hi, thanks. I had a follow-up on the CD campaigns. Have you always done both the spring CD campaign and a summer CD campaign or was this year unique in that you wanted to replace the $600 million of deposits that were included in the Desert Community Bank branch sale?

Dominic Ng -- Chairman and Chief Executive Officer

Well, I think it's a combination. We do see these campaigns in the past, but we haven't done it for years. I mean, obviously, if you -- most banks haven't done much CD campaign for years, because when interest rate -- Fed funds rate at 25 basis point and then -- and there are -- I mean -- customers really don't care one way or the other and we offer them like a 55 basis points CD rate is kind of like somewhat insulting that we just never had to do so much in the last few years until rate have risen up to the level that make it meaningful to do -- to go back and do the CD campaign. But I went back in the old days, we always have done Chinese New Year CD campaign, we've done Mother's Day CD campaign, we have -- I mean, Moon Festival CD campaign, summer, spring, whatever, we've done it all for the last 20-some-odd years, I've seen at all.

So this year, I mean, we just -- I think thank goodness that, I think the branches were very excited, they say, wow, finally, we got something exciting to do, because I mean, quite frankly for the last two years, because of the low rate environment, the branch enjoy the fact that they were out there bringing in DDA, small business, commercial deposit et cetera, et cetera, but they all -- I mean, and a part of their -- they are hard on -- they always have the desire also to bring in just pure retail customers. And CD had worked really well in the past by using CD as a leading product to allow them to cross-sell other things. And they didn't have that vehicle for the last few years. And so, finally we come back and do this one spring and summer CD campaign with some really interesting give away gift, and that had given a lot of energy back into the retail branches.

So, I looked at it as that we don't know whether we will do another one next year or not, but we'll see how the environment is and then we will basically manage the business in the most appropriate way, depending on the circumstances next year.

David Chiaverini -- Wedbush Securities -- Analyst

Okay. Thanks for that. And then separately, more and more banks are getting into the capital call line business. So I was wondering, are you seeing spreads narrow on capital call lines?

Dominic Ng -- Chairman and Chief Executive Officer

Not really, not in the capital call line. I would say that you are right, I mean, there are a lot more banks now just a last year or two has jumped in and we've been in this business now for five, six years. And so, we have clients that came to us five, six years ago when there were very few banks who are doing this business. And so, we are continuing to have great relationship with these clients and then because of our services level has been very satisfactory to them. And then so we still have our share of business. So, I would say that, maybe in time because everybody jumping in joining like come-lately that may be some pressure down the road. We at East West Bank haven't seen much lately.

Operator

And this will conclude our question-and-answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks.

Dominic Ng -- Chairman and Chief Executive Officer

Well, thank you. I would just wanted to thank, everyone, who joined the call today and we are looking forward to presenting our fourth quarter year-end earnings in January. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.

Duration: 58 minutes

Call participants:

Julianna Balicka -- Director of Strategy and Corporate Development

Dominic Ng -- Chairman and Chief Executive Officer

Irene Oh -- Executive Vice President and Chief Financial Officer

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

Aaron Deer -- Sandler O'Neil and Partners -- Analyst

Christopher McGratty -- KBW -- Analyst

Matthew Clark -- Piper Jaffray -- Analyst

Michael Young -- SunTrust Robinson -- Analyst

Lana Chan -- BMO Capital Markets -- Analyst

David Rochester -- Deutsche Bank -- Analyst

Gary Tenner -- D.A. Davidson -- Analyst

David Chiaverini -- Wedbush Securities -- Analyst

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