Earnings Call: Q3 2013

Oct 17, 2013

Good day, and welcome to the East West Bancorp third quarter 2013 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. Please note this event is being recorded. I would now like to turn the conference over to Kelly Adams. Please go ahead. Good morning, and thank you for joining us to review the financial results of East West Bancorp for the third quarter of 2013. Here to review the results are Dominic Ng, Chairman and Chief Executive Officer, Julia Gouw, President and Chief Operating Officer, and Irene Oh, Executive Vice President and Chief Financial Officer. We will then open the call to questions. Second, 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 factors that 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, 2012. Today's call is also being recorded and will be available in replay format at eastwestbank.com. I will now turn the call over to Dominic. Thank you, Kelly. Good morning, and thank you all for joining us this morning for our earnings call. Yesterday afternoon, we were pleased to report financial results for the third quarter of 2013. East West reported solid earnings of $73.2 million, or $0.53 per diluted share. Net income improved by $2 million, or 3%, and earnings per diluted share increased by $0.05, or 10% from the prior year period. Our third quarter operating results marked the 11th consecutive quarter we have increased earnings per share, resulting in a solid return on average equity of 12.65% and return on average asset of 1.22% for the quarter. Driven by strong loan growth, we increased total assets by 5% to $24.5 billion as of September 30, 2013. This strong loan growth also contributed to a small increase in the adjusted net interest income to $192.4 million for the third quarter, up $189,000 from the second quarter. In fact, compared to both the prior quarter and the prior year period, during the third quarter, we increased pre-provision net revenue, return on equity, and earnings per share while growing both loans and deposits at the same time. As of September 30, 2013, total loans receivable increased 6%, or $946.7 million, quarter-over-quarter to a record $17.2 billion. The loan growth for the third quarter was driven by strong, diversified loan originations throughout the bank. As in prior quarters, single-family residential loan originations from our retail branch network continued to be very robust, with single-family loan balances increasing 16%, or $424.9 million. Additionally, non-covered commercial real estate loans and commercial industrial loans also grew in the quarter, up 6% and 4% respectively. Along with strong loan growth, we have continued to successfully acquire new commercial deposit relationships. Total deposits increased 6%, or $1.1 billion, during the quarter to a record $20.4 billion due to growth in core deposit of 8% to a record of $14.4 billion. We continue to make good progress in our ongoing efforts to increase low-cost commercial deposit relationships. The strong growth in our core deposit was fueled by an increase in non-interest bearing demand deposits. As of September 30, 2013, we had $5.8 billion in non-interest bearing demand deposits, the highest ever in the history of the bank. Also, the average cost of deposits improved to 30 basis points, down three basis points from the second quarter and down 11 basis points from a year ago. With our solid financial results for the third quarter of 2013, we believe that East West is on target for another year of record earnings. Our healthy capital base and solid, consistent earnings provide strong return to shareholders. Year-over-year, we have increased the tangible book value per share by 7% to $13.96 as of September 30, 2013. Finally, we were pleased to announce last month that we signed a definitive agreement to acquire MetroCorp Bancshares, Inc., a $1.6 billion bank holding company headquartered in Houston, Texas. Metro operates 18 branches under its two subsidiary banks Metro Bank and Metro United Bank in the cities of Houston, Dallas, Los Angeles, San Francisco, and San Diego. We are excited about the opportunities to expand in the attractive Houston and Dallas markets and strengthen our footprint in California. Metro is a great fit with East West, and we are confident that we will be able to execute a successful integration. Currently, we expect the merger of Metro to close in the first quarter of 2014 after we obtain the necessary approvals by the shareholders of MetroCorp and by our regulators. The transaction is expected to be 4% accretive to East West's 2014 full-year earnings per share, excluding any merger and restructuring charges. With that, I would now turn the call over to Julia to discuss in more detail on the financials for the third quarter. Thank you very much, Dominic, and good morning to everyone. I would like to spend a few minutes discussing the loan growth we experienced during the quarter, our net interest margin, and our expectations for the future. Finally, I will review the guidance we provided in the earnings release yesterday for the remainder of 2013. Our total loan portfolio increased to a record $17.2 billion at September 30, 2013, an increase of $946.7 million, or 6%, from June 30, 2013, and an increase of $2.7 billion, or 19%, year-to-date. As expected, covered loan balances continued to decline, decreasing $145.8 million, or 6%, quarter-to-date. This decrease in the covered portfolio was more than offset by the strong growth in the non-covered portfolio. Continuing the trend from the first half of the year, we experienced good growth in our non-covered single-family residential loan portfolio and our commercial real estate portfolio, which increased by $424.9 million, or 16%, and $243.3 million, or 6%, from the second quarter of 2013, respectively. Additionally, commercial and industrial loans increased $171.7 million, or 4%, as well. We continue to generate strong residential loan demand from our retail branch network. The current market conditions have allowed us this opportunity to book high quality, low loan-to-value loans that have low capital requirements and carry an attractive yield. During the third quarter, we originated approximately 1,400 single-family residential loans totaling $590 million, with an average loan size of $400,000 and an average loan-to-value of 56%. The current market conditions have allowed us to originate high volumes of residential loans for the last two quarters. Although we do expect to see solid residential loan originations in both the coming quarter and the coming year, we expect that over time, the origination volumes will taper off and decrease from the current levels. Although the growth in the non-covered portfolio is offset by the expected reduction in the covered portfolio, at this point, with the strong growth we are experiencing, we believe that we can grow the total loan portfolio by at least $400 million through the end of this year. Next, I would like to spend a few moments discussing the net interest income and net interest margin for the third quarter and our expectation for the remainder of 2013. Net interest income, adjusted for the impact of covered loan activity, totaled $192.4 million for the third quarter of 2013, an increase of $189,000 from $192.2 million in the prior quarter. The core net interest margin totaled 3.44% for the third quarter of 2013. The compression in the core net interest margin compared to the prior quarter was largely due to the decreases in the adjusted yield on the covered loans and in the yield on non-covered loans. Overall, we had a good quarter. We increased net interest income slightly, lowered deposit costs, and maintained good expense control while substantially increasing loans and deposits to record levels. We feel confident that we are building lines of business and making operational improvements that will benefit us for many years to come. Although the low interest rate environment continues to result in the decreasing interest margins for most banks, including East West, with strong loan growth we experienced and expect to continue to generate, we are confident that we can continue to generate solid earnings and returns until short-term rates increase. Based on our last interest rate sensitivity analysis, once the short-term rates increase 100 basis points, we will see a $50 million increase to our annual net interest income. After a 200 basis point increase in rates, the impact to our annual net interest income is about $100 million. Lastly, I would like to provide a brief summary of our guidance for the remainder of 2013. As in the past, in our earnings release yesterday, we provided guidance for the fourth quarter and full year of 2013. Yesterday, we updated the guidance provided in July, and we now estimate that fully diluted EPS for the full year of 2013 will range from $2.09 to $2.11, an increase of $0.20 to $0.22 or 11%-12% from $1.89 for the full year of 2012. For the fourth quarter of 2013, we estimate that the fully diluted EPS will range from $0.53 to $0.55. With that, I would now like to turn over the call to Irene Oh to discuss the third quarter of 2013 financial results in more depth. Thank you very much, Julia, and good morning to everyone. I'd like to discuss our financial results for the third quarter of 2013 in more detail, specifically credit quality, non-interest income, and non-interest expense. Starting with credit quality, we are pleased to see that non-accrual loans decreased $8.1 million, or 7%, from the second quarter of 2013 to $103.9 million as of September 30, 2013. Additionally, the total non-performing assets, excluding covered assets, to total assets ratio has been under 1% for over three years, with non-performing assets of $124.1 million, or 51 basis points of total assets as of September 30, 2013. For the third quarter of 2013, the company recorded a provision for loan losses for non-covered loans of $4.5 million, as compared to a loan loss provision of $8.3 million for the second quarter 2013. East West continues to maintain a strong allowance for non-covered loans of $234.2 million, or 1.6% of non-covered loans receivable at September 30, 2013. Total net charge-offs on non-covered loans totaled $334,000 for the third quarter of 2013, a decrease from net charge-offs of $4 million in the second quarter of 2013. During the third quarter of 2013, the company recorded a reversal of provision for loan losses of $964,000 on covered loans. As these loans are covered under loss-share agreements with the FDIC, for any charge-offs, the company records income of 80% of the charge-off amount in non-interest income as a net increase in the FDIC receivable, resulting in a net impact to earnings of 20% of the charge-off amount. Additionally, during the third quarter of 2013, we recorded an expense of $15.2 million as a clawback liability. Under the loss-share agreements with the FDIC, if losses in the covered portfolio do not reach specific thresholds, the bank is required to pay the FDIC a calculated amount. As of September 30, 2013, our total recorded liability to the FDIC for this clawback liability for both the UCB and Washington First International Bank acquisitions is approximately $66 million. Moving on to non-interest income and expense, East West reported a non-interest loss for the third quarter of 2013 of $41.1 million, an increased loss from non-interest loss of $12.4 million, and decreased income from non-interest income of $2.8 million in the second quarter of 2013 and third quarter of 2012, respectively. The additional loss of $29 million of non-interest income in the current quarter compared to the second quarter of 2013 is due to changes in the net reduction of the FDIC indemnification asset and FDIC receivable. In total, fee income including branch fees, letter of credit, and foreign exchange income, loan fees, and other operating income totaled $27 million in the third quarter of 2013, a slight decrease from the prior quarter and an increase from the prior year period. The decrease in fee income during the third quarter of 2013 as compared to the prior quarter, was due to other operating income, with decreased income from interest rate swaps entered into by our customers. During the third quarter, we recorded net gain of $3.9 million on the sale of about $40 million of 7(a) SBA loans and $1.1 million from the sale of investment securities available for sale. The investment securities we sold during the third quarter were largely fixed-rate agency MBS and CMBS securities totaling $60 million. Moving on to non-interest expense. Total non-interest expense for the third quarter, excluding amounts to being reimbursed by the FDIC, increased $6.3 million or about 7% from the second quarter of 2013, and decreased by $115,000 from the third quarter of 2012. The increase in non-interest expense quarter-over-quarter was primarily due to an increase in legal expense and other operating expense. Legal expense increased $3.5 million from the second quarter of 2013, resulting from the resolution of litigation, including covered assets. Additionally, the company recorded a net gain on sale of other real estate-owned assets of $1.2 million in the second quarter of 2013, compared to an expense of $157,000 in the third quarter of 2013. Additionally, during the third quarter, we increased long-term debt outstanding by drawing down $50 million on our unsecured borrowing facility, which is at an attractive rate of the three-month LIBOR plus 150. This action was taken to increase liquidity at the holding company and, among other actions, allow for future repayment of higher cost junior subordinated debt. Finally, as stated in the earnings announcement released yesterday, East West Board of Directors has declared fourth quarter dividends on the common stock. The common stock cash dividend of $0.15 is payable on or about November 15, 2013, to shareholders of record on October 31, 2013. I'll now turn the call back to Dominic. Thank you, Irene. I will now open the call to questions. Very much. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Dave Rochester with Deutsche Bank. Please go ahead. Guys. On the loan pipeline, I know you guys discontinued the Resi 5-1 ARM product this quarter. Do you think the 3-1 ARM demand you can see in the pipeline right now is strong enough to keep that resi growth going in 4Q near that pace in 3Q? Yeah, I think that people make a choice whether it's three year or five year. Some of them have been taking three years, some of them taking five year with slightly higher interest rates. I don't think that eliminating the five year will change the pipeline. It is just a choice that they have to make. Do you guys have a concentration limit in mind for that Resi product? I know the loss history on that's been great, but I was just wondering where your comfort level is now that the Resi is over 20% of the total portfolio. Well, I think that, from our perspective is that, we do like the quality of these loans. Normally what we like to do is to keep a very even distribution in terms of concentration from both C&I, CRE, residential, consumer, et cetera, as even as possible. In the meantime, we do look at it as that residential mortgages are somewhat of a volatile business in terms of volume. This is the time, obviously, with interest rate just about starting to rise, and then also home prices are rising. Obviously, a lot of people are hurrying up and trying to buy their homes and also hurrying up to trying to get their refi done before it's too late. I would expect that the volume that we are having right now is something that most likely we would not be able to enjoy two years from now. As much as the volume is picking up in the residential mortgages today, and it seems like growing the pace that may soon to be the highest percentage of our portfolio if the trend continue to go on for the next two years or so, the reality is that it's not likely. I think that once it get to a certain level, it will taper down, and the next thing happen, the C&I, the other type of loans will start picking up. Then also our operation in Hong Kong and China, with our now online banking platform putting together, it makes it a little bit more realistic for us to make some decent C&I loans in the Greater China region. That will pick up a little bit here and there. All in all, I would think that it's still going to come back down to a fairly even distribution in the end. Okay, great. Thanks. Just one more. Does your EPS guidance for 4Q include some kind of an estimate for the clawback? I know that's been a little higher recently in the last couple of quarters. Do you have a sense for what that might be in 4Q? We estimate the clawback as part of that. So that's what we're expecting the net EPS going to be. In terms of versus the $15 million we had this quarter, I know you guys normally have an expectation for scheduled accretion as well. Do you happen to have the scheduled accretion estimate for 4Q as well as the clawback estimate? We think that the accretion probably would taper down. So this Q3, $12 million, Q2 $15, so probably more like about $10 million a quarter. But some of them will be offset by the clawback. That's partially the reason why we give the range. I think the clawback is a function of the actual loss experience, things that happen, the cash flow. It's hard to give an exact number, but in our minds, probably around $10 million-$15 million, around there is probably what we're looking at. Okay, great. Thanks, guys. Our next question comes from Jennifer Demba with SunTrust Robinson. Thank you. Good morning. Good morning, Jennifer. Dominic, I was just wondering if you could talk about what you envision the long-term strategy will be in Texas now that you're going to increase your presence there with the Metro acquisition. Metro, at this point, is like a sort of mini East West from our old days. It has a very strong hold in the Asian American communities. Actually, clearly it's the leading franchise within the Chinese American community in terms of banking. I think that's a great brand to start with. But on top of that, I think Houston and Dallas are two markets, and I would say that Texas in general. If you look at the number in Texas in terms of the population of Asian Americans in Texas, I think it's ranked third behind California and New York. In terms of volumes of import and export from China, ranked third behind, again, California and New York. Basically, all the elements that we're looking for for bridge banking at East West, something that is already happening in Texas. There are direct flights from Houston by Air China to Beijing that just launched two or three months ago. Soon, American Airlines will launch a direct flight from Dallas to Shanghai and Hong Kong next year. We just see the potential of growth in Texas to be pretty phenomenal for a bank like East West because of what we do. Our hope is to work with the folks at Metro, which already are very good at what they're doing in terms of in the local community, and they are obviously well aware of the potential of the bridge banking in terms of helping U.S. and China business between two shores. Our position is that we have products, we have the industry expertise, and our plan is to make sure that we go to Texas and work with the Metro Bank folks and then turn Metro Bank into more resembling like East West today. I think that there is plenty of potential to make that happen. Would you envision getting into energy lending at some point? Yes, we'd love to. If you look at East West Bank right now, our industry focus has been very strategic. We looked at what the investors and business from China want, and then we make sure that we have those industry expertise available at East West. A good example is that, obviously, we do a lot of real estate, and then Chinese investors are coming to U.S. and buying a lot of real estates from hotels to office buildings, and then single-family homes and so forth. Then you look at agriculture, high tech, life science, entertainment, films. These are the type of activities that the Chinese companies are coming to U.S. to look into either collaboration or acquisitions. Energy is a big thing in terms of for Chinese investors. Clearly, that is a high priority there. Frankly, from an East West Bank point of view, we currently do not have much exposure in that area because we only have one branch in Houston. With Houston, Dallas, and combined with Metro Bank and altogether 13 branches, I think that we clearly would have some opportunity to explore our expansion into the energy sector. If we do well there, I think that it can get beyond Houston and Dallas. There will be opportunities. I'm not thinking about expanding in terms of branch network, but there are obviously commercial banking activities in the energy sector from Oklahoma to Denver. I do feel that there are all these opportunities that potentially will be available. But first thing first is that we need to close the deal with Metro Bank and have the platform available. Then after that, I think it makes it easier for us to build up the expertise. If you look at what we've done in California from the entertainment sector, it didn't take long for us to build up that expertise and then the business simply because we have a great value proposition here. With our contact connections and our ability to provide Chinese currency lending and also deposit in China, it does make it very convenient for a lot of American business who need to do business with folks in China. Thanks a lot, Dominic. Our next question comes from Lana Chan with BMO Capital Markets. Hi, good morning. Good morning. Good morning. I guess coming into the quarter, the guidance was for a stable balance sheet relative to 2Q. Given the very strong deposit growth, the buildup of excess liquidity and cash continued into this quarter, how quickly do you think you'll be able to redeploy some of that into loans which would obviously help ease some of the core margin pressure? We estimate that most likely we can do at least $400 million net increase on the loan portfolio for the Q4. That will use up some of the excess cash liquid asset. We had very strong quarter for Q3. A lot of the companies and new relationship we acquire have a lot of cash. We don't think that kind of growth is really sustainable. For the deposits. For the deposits, yeah. I think that we'll use up some of that, our cash in Q4. Okay. And I think, Julia, at a recent conference, you had thrown out that the core margin could potentially bottom at around 350, and clearly it sits below there now. Any recent update on that given the trends that you're seeing now on the core margin? Yeah. We've seen all the excess liquidity and continue pressure. I would say maybe 340, like around there. Yeah. One of the things this quarter that did happen is that generally we estimated that the net accretion from the covered portfolio is about $15 million. Some quarters, like last quarter, was a little higher, $18 million, $19 million. This quarter, actually, it was a little bit less at about $12 million. That was one of the reasons why versus our projection, it was a little bit low. As you know, it's hard for us to predict with the cash flow activity what's going to happen with that accretion. As Julia mentioned earlier, this is why, obviously with the balances coming down and the accretion being lower, we are expecting on a regular basis, we're modeling $10 million instead of the $15 million that we did before. Okay. Just one last question from me before I queue back up. It's on terms of loan pricing, could you give us an update on what some of the new loan yields are coming in on? I know the resi mortgage, but how about on the C&I and commercial real estate side? On the average, about LIBOR + 350, 375, in general, on the average. Okay, that's been pretty consistent for the last couple of quarters. Yeah. Okay. Thank you. I think one thing I wanted to highlight is that our margin's always going to be affected by the accretion and then also the clawback. Those are the two things that's a little bit more difficult for us to predict. Ultimately, I think what we should keep in mind is that at the end of the day, we have that much on the balance sheet. Eventually, we still have to use it up. There may be two or three quarters in a row that we come out short, but ultimately, we're still going to have to recognize those into income eventually. So that will affect the margin here and there, and then I think it's just something that we have to keep in mind. Okay. Dominic Ng brings up a good point. At the end of September, the amount of net accretion that we have left is about $83 million. That's an increase from last quarter because we made some adjustments as far as our credit marks and moved some of the non-accretable yields to accretable. So even though the clawback went up, in total net net, it's still positive for us because ultimately it's because we're having less losses. For us, ultimately what we want to do is to continue to grow the net interest income. So even though the margin is somewhat compressed because of the low interest rate environment and our discipline to not take on interest rate risk, that's why we project that if short-term rates go up 100 basis points, our net interest income can go up about $50 million a year. So rather than take on interest rate risk at this time, we will continue to keep the investment short and redeploy to the higher yielding loans. So eventually the net interest income will continue to grow. Great. Thank you very much. Thanks, Lana. Our next question is from Herman Chan with Wells Fargo. Great, thanks. On the core loan yields, how should we think about the trend there? Should we expect some stability there in light of the robust residential mortgage loan production that the bank is seeing? I would say that it's drifting down just a little bit because of the repricing of the existing loans too. That's what we have seen in the last two quarters, unlike before where the loan yields declined quite a bit. I think the trend now is that the loan yields may be drifting down just a little bit. We don't have a lot of room for the deposits. We saw some slight decrease, but I don't think that the deposits will go down a lot more. The loan yields will drift down a little bit. Great. A question on capital management. How would you characterize the bank's appetite for further M&A at this juncture? Are there any other markets that appeal to the bank? Well, when something comes to our table that looks attractive, we will move quickly. But at this point, I don't anticipate anything soon because we like to do things one step at a time. Obviously with MetroCorp's mergers pending, we're going to be focusing in the next five to six months on getting this deal done and then doing a good job in terms of integration and then execute our long-term strategy accordingly. In the meantime, we're always on the lookout to see whether there is anything good out there. But as we said it over and over again, we are going to be very choosy. We are going to be very disciplined. We will not do a deal just because we need to do a deal. Frankly, the reason we can say that comfortably is because if you look at our organic loan growth, why would we want to actually go out there and make acquisition, unless it's something strategically very compelling. Right. Understood. Lastly, in terms of the buyback, there still remains the $100 million authorization outstanding. How should we think about utilization of the buyback in 2014? We always would like to have some buyback that are authorized by the board, but depending on the stock price and our loan growth, we would be very judicious about buyback. I would say that we don't incorporate any more buyback in our earnings projection at this time. Great. Thank you very much. Our next question comes from John Pancari with Evercore. Good morning. Morning. Good morning. In terms of your pipeline in the resi mortgage product, I know, Julia, you had indicated that you expect some tapering of that volume in that product. Are you seeing any slowing yet in the pipeline? Secondly, can you quantify the pace of that tapering that you could see? Well, at this time, it looks like the pipeline is strong, but in general, you would think that as time goes by, the volume will not be as what it is now. In addition, the volume of purchases and refinancings may go down in the next year or two. We are making a general assumption that this kind of volume is not sustainable, so we don't want people to expect that we continue to grow at this pace. Okay, but you're not seeing any indications of it yet in the pipeline? Not yet. Okay. Back to the accretion topic, do you have the amount that you had transferred from non-accretable to accretable? I don't have that in front of me, but John can give you that afterwards. The net result was, at the end of June, the net P&L was $73 million. We had accretion during the quarter of $12 million, then at the end of September, we're at $83 million. Okay. All right. Lastly, can you give us a little bit more color on the drivers of growth that you saw in the income-producing CRE book, as well as what you saw in the C&I book this quarter? It's mostly across the board. Many of the CRE is our current existing clients that are buying more properties as well as some new clients. So nothing really major, but it's just across the board that we see an increase. On the C&I side? Same thing with the C&I. Okay, thank you. Thank you. Our next question comes from Ebrahim Poonawala with Bank of America Merrill Lynch. Good morning, guys. Good morning. Good morning. I just have one question, just in terms of your loan growth guidance for the fourth quarter, and probably looking ahead a little bit into 2014. I mean, I appreciate your wanting to be conservative as you sort of guide this. But based on your comments in terms of the pipeline and the strength you're seeing, is there any reason why we cannot see growth in the next quarter as well as going into the first half of next year being significantly higher than sort of what you're guiding towards and kind of closer to what we've seen over the last couple of quarters? I would say the last couple of quarters are very high. We just don't think it's sustainable to increase almost $1 billion every quarter. We are happy if we can be under $400 million net increase. Well, let's keep in mind, in the second quarter, we have made some good acquisition of loans. So we bought some loans in the second quarter. You do have to take that out. Well, we still have very healthy organic growth. I do expect that in the fourth quarter at this point, looking at the trend, the fourth quarter or the first quarter of next year, the trend is that there's most likely we're going to have healthy growth. But as I said earlier, these residential mortgages is something that you can't predict too much. That's why the nice thing about having all engines going at the same time is that if one down, the rest of them still going, and that's good. We never wanted to be in a position that we're going to only counting on residential mortgage growth. I think that we are working very well with the branch network in terms of developing their capability to help us to originate multifamily loans. They are also making good referrals on commercial real estate loans. We see that momentum probably picked up even more by the branches that offset, again, some of the pressure from the traditional commercial lenders. When one slow down a little bit, the other one pick up a little bit, and that's what we're trying to do. Obviously, when there's opportunity to make an acquisition of some decent loans that have good yield and strong credit quality, we won't hesitate to do that. But those are very opportunistic. With the combination of some of these opportunistic things that may come to us, our whole organic growth, I would expect that 2014 will probably will look somewhat healthy. Got it. Thank you very much. Thanks, Ebrahim. Our next question comes from Joe Morford with RBC Capital Markets. Thanks. Good morning, everyone. Good morning, Joe. Did you perhaps have some recoveries in the second quarter that boosted non-covered loan yields and maybe led to that more stable core margin? If so, can you quantify those or tell us how many basis points that contributed to last quarter's core margin? Joe, I don't have that number in front of me, but yes, we did have some recoveries last quarter, which increased in cash transactions, really. It's cash items that increase the yield on the covered portfolio. That's why the net accretion was about $18 million-$19 million in Q2, where we normally estimate 15, and in this quarter, that was actually 12. Additionally, for the portfolio in China that we purchased with the UCB transaction, those are not covered, but those are also accounted for under SOP 03-3. So there was some recovery in that in the second quarter. So that's why if you look at the loan yield for the non-covered loans in Q2, it actually went up slightly from the first quarter. In this environment, that's not something that usually happens. So I think if you look second quarter to third quarter, the delta there was a little bit greater because second quarter was a little bit unusual. Okay. But you can't quantify that recovery in China? I just don't have it in front of me. I can give you that after the call. Okay, that's fine. The other question, I guess, was just any comment about what we might expect in terms of the pace of runoff in the covered portfolio from here? Should it continue at the recent pace, or could perhaps we see it step up as we get closer to the end of loss-share agreement? Well, so it was $145 million, $50 million this quarter. I don't think it will necessarily increase because also that dollar amount is on a lower base as well, quite frankly. We haven't done anything different on the portfolio. We've continued to kind of work through it from day one, continue to do so. So we feel like there's no other kind of change as far as what our actions are for the end of loss share, which will be for us largely November next year. Right. Okay, thanks, Irene. Thanks, Joe. Our next question is from Aaron Deer with Sandler O'Neill. Hi, good morning, everyone. Good morning, Aaron. The deposit growth in the quarter was pretty impressive, and Dominic, you had mentioned that it sounded like a lot of that was in business accounts. I am wondering if you can give a breakout in terms of what was, say, commercial operating accounts versus retail, and if you can give a sense of what helped drive that strong growth this quarter. I think the big amount is on the commercial side because those are the big dollar amounts, and that is why the demand deposits go up a lot. Yeah. Was it like larger customers or No, no single really large. It's just across the board. As Dominic mentioned, we are working with the branches, and over the years, we've built a platform that we can continue to generate deposits, commercial deposits, either from the branches or from the lending team or the non-loan specialty deposits. Just across the board, the volume go up. But it's also a reflection of the macro economy where a lot of corporations are flush with cash. I think that the trend seems to be similar with other big banks that they see more and more companies are accumulating cash. Okay. Irene, it looks like there was a swing in the provision for unfunded commitments. I think it went from negative $400,000 to $3.4 million this past quarter. I didn't see that in the other non-interest expense line. Where is that? Or was it just buried in there that some other noise canceled that out? Yeah. So the increase in the allowance for unfunded loans, is that what you're referring to? Yes. Oh, yeah. So that's part of that provision that we have on balance sheet as well. And the reason that increases quarter, Aaron, is we did have an increase in total commitments, and also part of that was an increase on commitments on construction loans. So we made a little kind of modification to our normal kind of calculation for that. Was that in your regular provision line item? Or was- Yeah, we combine both on-balance sheet and off-balance sheet into the provision. Okay. All right. Very good. Thanks. Our next question comes from Brett Rabatin with Sterne Agee. Hi, good morning. Good morning, Brett. Wanted to ask on the margin guidance for the fourth quarter. Can you give us some color around your expectations with the loan yields coming down? Can you talk maybe about what you might have repricing at higher yields? If possible, kind of how much of the portfolio might still be higher than 5%? Just some thoughts on relative payoffs versus originations in the loan portfolio. Well, Brett, I said probably there's very little that's repricing at a higher yield. We do have the higher upwards of 5%. Overall, the single family loans have a more attractive yield, especially given kind of the duration. As Julia mentioned earlier, we're only doing the 3-1 ARMs. I'd say at this point, nothing's really kind of repricing higher than that. Right. What I am trying to imply is how much do you have still like over 5% in your portfolio that might be repricing, and you are replacing that with lower yielding type product? There are some. I don't think it is a big amount, but there are always some of the older commercial real estate loans that were fixed at a higher rate that once the fixed time expire will go down to a lower adjustable rate. Okay. You talked earlier about the liquidity build and the deposit flows and growth for the fourth quarter. In terms of using some of that liquidity, can you talk also about just repayments of borrowings and if the margin guidance implies that you are going to reduce some of the borrowings in the fourth quarter? Just any thoughts on repaying what you have left? Yeah. Probably not at this point with the FHLB advances and the repos. Those are not things that we are factoring in as far as repayment. We may pay off some of the junior subordinated debt, the higher rate ones, but the impact to that, to fourth quarter, is going to be de minimis. Okay. Based on the timing of it, et cetera. Okay. The other thing I was curious about was just SBA and just any thoughts around what you're seeing in terms of the SBA market and your decision quarterly to either sell or not sell those loans as you originate them. We do look at it from time to time, whether to sell those SBA loans or not. We will make a decision if we think that the pricing is attractive and it makes sense for us to sell the portfolio. We are just thankful the government allow us to get back into SBA business today. Okay, great. Thanks for the color. Once again, if you'd like to ask a question, you may do so by pressing star then one. Our next question comes from Julianna Balicka with KBW. Good morning. Good morning. Good morning. I have a couple of questions, although many of them have already been asked. Just to kind of follow up back to the guidance and the accretion numbers versus your projections in the third quarter. You talked about having booked $7 million of accretion and projected $15 million. Correspondingly, the clawback this quarter was $15 million. What was that number in your projection for the third quarter guidance? I do not have that in front of me exactly, Juliana, but it was less than that, a little bit. I think it was probably like $10 million-$12 million. I cannot remember exactly. If you adjust for that, looks like you actually beat your original guidance by about $5 million-$6 million in terms of underlying core income. I guess if you look at it that way, that is correct, Juliana Balicka. Okay. Good. So then, kind of going into the loan growth guidance increase to $400 million from $250 million that you would like to and be comfortable achieving. That data, is that mostly coming from your residential strength of your residential loan pipeline, or are you looking at that $150 million as more CRE, C&I areas of lending? If you can kind of break that down. We increased that projection because we know the pipelines, when it comes to the residential mortgages, once the applications are in, we can project that on the funding versus the other type of loans, there is not a lot of certainty of closing. We did increase it because we know that residential mortgages continue to be fairly strong. Okay, very good. So and within that then, the underlying $250 million is still your just baseline across the board commercial lending, right? Right. Okay. Right. Okay. You talked about for this coming quarter, that the redeployment of excess liquidity and cash and a stable balance sheet, and your deposit growth was strong in business banking this quarter. Could you talk about some of the drivers that you expect your deposit growth to slow down that appreciably or if that's just a seasonality impact? Yeah. As corporations, companies are investing more and growing, sometimes, or buying properties. So we do expect that over time, people may be using up their liquidity also. So that's why we think that this kind of increase in cash, that companies carry probably, and our deposit growth that is very strong, is not sustainable. Especially at this level. Over 30% kind of increase in core deposits on an annualized basis is probably not the normal run rate. Well, you also have the gain then for the customers. They're indifferent in terms of whether they put it into DDA or even sometimes into an interest-earning money market because the basis point difference is not really that much. But in time, I've been looking for this for the last five years now. We always say that go short and then wait for rate to rise. I've been still waiting for five years, and it hasn't happened yet. It may be two more years before it happens or maybe five more years. Next thing it will be like Japan. The way I look at it right now is that because of the indifference from both retail customers and also commercial customers, I think that growing the core deposits and also having this huge growth of DDA, frankly, is a lot easier. Wait till we go into a different rate environment, I think that things will change dramatically. We are well aware of that. This strength that we have today, it's not something that we should expect. I don't know when, maybe a year or 2 or 3 years later, it depends on what the rate environment will be. Every time I hope rate will go up, and then things turn out to be different. At this point, we get so used to in this sort of basically low rate environment, I think that things are going okay. I do like the idea about that if rates do go up one day, we are in a much better position to take advantage of the rising rate, simply because the balance sheet is made up to take advantage of it. Okay. That makes sense. On a long-term basis, that does make sense in terms of deposits growth. That implies that for the fourth quarter, if the momentum pulls through the quarter, you could potentially see, again, bigger balance sheet growth than you expect with a slightly smaller margin. If the deposit growth doesn't slow down quickly enough. Well, I think that to a certain extent, I think that we don't have to take on all the deposits that comes in. I think that it's something that we obviously has an ability to work with some of our clients, to make sure that we don't have to just take them all in. I think to a certain degree, we do have control. This is all getting back to a long-term relationship with a short-term margin. That's something that we have to always make a decision on one way or the other. I think that we can always err to long-term relationship with a short-term margin. Frankly, it has a lot to do with our ability to have this massive organic loan growth. As long as we do another one of those, to our own surprise, type of loan origination in the fourth quarter, then we'll continue to open the door and let the clients just bring us down all these deposits. On the other hand, if we actually see that the loan growth is not getting far beyond our expectation, then we will make sure that we'll be a little bit more focused on the short-term margin issue. That's the kind of things that we always play. Ultimately, it's really focusing on shareholders value. We do recognize that we don't want to jeopardize our long-term shareholder value. In the meantime, we also recognize that we are a public company, we do quarterly conference call. Therefore, let's not get too far away from everything stuffing into long term and ignore the short term. There is a balance in between, and then we're going to do the best we can to make sure that we do the best thing for our shareholders. Got it. Very good. Thank you very much. Our next question is from Matthew Clark with Credit Suisse. Good morning. Good morning, Matthew. I think you guys have since you did the UCBH deal, I think you've been somewhat hesitant to grow meaningfully in Texas and New York, and obviously two of the top three markets. Now you have the deal in hand with Texas. I guess when you think about New York, do you need an acquisition there, or is there an opportunity to hire and maybe build that presence more meaningfully? We actually have hired not a big group, but a small group of commercial bankers. We are gearing up, I think, a decent momentum going forward in 2014. Obviously, these new hires just started with us. Some of them just been with us only a few months ago, and some of them just started maybe less than a month. We will continue to recruit talented commercial bankers in New York to help us to grow our business. Don't forget, we still have our retail branches in New York also, and we're going to continue that. In fact, we just hired a very small group of lenders in Boston and replicating the same thing in Atlanta. While the contribution today is small, but little by little, they add up. In 2014, we'll continue to look at opportunities to acquire more talent. Our position is this: without seeing any great acquisition in sight, we'll continue to do it organically, one account officer at a time. In time, when we make the right hire, they will start accumulating the business, the commercial banking business for East West Bank. In the meantime, while we're doing that, we're still on the lookout for any kind of potentially good acquisition. But we will never put ourselves in a position that we will need to make acquisition in order for us to make our numbers. Because once we do that, I think there's high likely that we'll make desperate moves, and then sometimes deals that don't make sense from a pricing point of view, but we have to do it because we just get the number up there. That will be too unfortunate. Our position is that we just keep hiring people one person at a time. I think that New York actually is building some decent momentum right now, and I do expect that it is going to get much better in the next few years. Can you give us a sense for the new group of folks you brought on in New York, the magnitude of their portfolio that they had at the prior shop? Well, they are so new, they do not have much of a portfolio. I think that- No, at the legacy, where they came from. Where they came from? Yeah. Different banks. Yeah. I'm just- Most of them from larger banks. Yeah. In terms of the size of the portfolio they were managing, I guess, is what I am wondering. It varies. Some of them that have been with the bank for a long time, as a manager, they actually have over $100 million. Some of them, as an individual lending officer, they have less. Maybe 20, 30 million portfolio. It varies. Okay. When you think about mainland China, I think you guys have also been hesitant to grow there for obvious reasons, adverse selection being the most important one. Any change there or any desire to build that book? We would build it slowly. I think that in the past few years, I think that the first two years we just were trying to clean up the book. For example, when we took over United Commercial Bank in November 2009, 33% of the China loan portfolio were non-performing. 33% were non-performing. Took us more than two years to basically clean it out. We build the system infrastructure. For example, we have basically two branches in China, but we did not have online banking platform. It is hard to service such a huge country when we only have two little branches in that country. Having online banking is, particularly we in commercial banking business, is critical. It took us over a year to try to put these things together when in the meantime, we're making sure that we systematically clean up the legacy UCB delinquent loans and stuff like that. We are in the position to start doing business, and we are comfortably now that the book is totally clean and we have the system capability. We also hire a new management team over there. We are ready to do business. We in fact, we have some great win. Helping U.S. team work with U.S. clientele to do some good financing business in China and vice versa. I think that we will expect them to do more in 2014 and 2015. However, why I think that they will do more? You have to look at it in this way, is that, for example, in China, our commercial lending loan balance is less than $200 million today. If they do a lot more and grow by 100%, they'll only be $400 million in terms of balance. Then that $200 million of increase for the whole year, if you look at it, is that comparable our $1 billion growth in one quarter is minuscule. I would say this, is that Hong Kong and China will have substantially higher percentage growth. But in terms of to the overall balance sheet, to the overall loans receivable balance, it still will be small. This is by design. We do not ever want to have East West Bank to be a bank that have equal number or equal dollar amount of loans in China versus U.S. This is a U.S. bank. We predominantly do U.S. business. But the one huge advantage that we have is that we know how to do business in China. We have a license to do business in China. Because of that, there will be plenty of business for us to work with our U.S. customers because there are plenty of business in U.S. who want to do business in China, need to do business with China, and there's plenty of business in China who want to invest in the United States. That's the space that we're focusing on. This has never been a business, and this will never be a business who has an intent to go to China to say that like Kentucky Fried Chicken, that we are going to go out there and then really going to go after the consumer market and get our market share of fast food business, anything like that. East West Bank is not going to go to China and say that we're going to go in and compete with Agricultural Bank of China or Industrial and Commercial Bank of China in terms of getting the market share of retail consumer banking customers. That's not in our strategy in the past, present, or in the future. So our plan is that there is going to be a lot of U.S.-China business that we can help advise, and we can help finance, and we can help provide banking service, and that's all we're going to do. Great. Thanks for the color. This concludes our question and answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks. Well, I want to thank everyone for joining us for today's call, and I am looking forward to speaking with you all in January 2014 for our fourth quarter earnings call. Thank you. Thank you. The conference has now concluded. Thank you for attending. You may now disconnect.