Earnings Call: Q1 2013

Apr 18, 2013

Good morning, and welcome to the East West Bancorp first 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 touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Kelly Adams. Please go ahead. Good morning, and thank you for joining us to review the financial results of East West Bancorp for the first 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. 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 a replay format at eastwestbank.com and streetevents.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 first quarter of 2013. East West reported solid earnings of $72.1 million, or $0.50 per diluted share for the first quarter. We increased first quarter earnings by $4 million or 6%, and increased earnings per diluted share by $0.05 or 11% from the prior year period. Following our third consecutive year of record earnings in 2012, we continue to demonstrate solid financial performance in the first quarter of 2013. This financial performance is driven by continued healthy growth in our loan and core deposit portfolios, improvements in credit quality, and reductions in operating expenses. Our operating results of $72.1 million marks the eighth consecutive quarter we have increased both net income and earnings per share, resulting in a strong return on average asset of 1.3% and return on average common equity of 12.45% for the quarter. Quarter to date, we grew loans, including covered and non-covered loans, by $285.1 million or 8% on an annualized basis. The loan growth was fueled by increases in non-covered single-family loans of $147.6 million, or 27% annualized. Non-covered commercial real estate loans of $110.4 million or 12% annualized, and non-covered commercial and industrial loans of $49.5 million or 5% annualized. The first quarter growth in non-covered commercial and industrial loans was less than the approximate $500 million increase in the same category for the fourth quarter of 2012. As discussed in the earnings call last quarter, a reduction in the growth for the first quarter of 2013 was anticipated as there were many loans originally planned to be booked in the first quarter of 2013, ended up closing earlier right before year-end of 2012. On the deposit front, in the first quarter of 2013, we continue our focus on attracting low-cost core deposits. As of March 31, 2013, we reached record levels of both total deposits and core deposits of $18.9 billion and $12.9 billion respectively. Our ongoing effort to increase profitable, low-cost commercial deposit relationships has continued to be successful, and the strong growth in core deposit was fueled by an increase in non-interest-bearing demand deposits. As of March 31, 2013, we had $4.8 billion in non-interest-bearing demand deposits, the highest ever in the history of East West Bank. The growth in core deposits contributed to a reduction in the cost of deposits from 40 basis points from the fourth quarter to 37 basis points for the first quarter of 2013. 2013 marks the 40th anniversary of East West Bank, and throughout our history, we have consistently performed well and outperformed our peers, even in challenging operating environments. Although the low interest rate environment and slowly recovering U.S. economy continue to pose challenges for revenue growth in the industry overall, East West continues to perform well and outperform many of its peers with higher growth, profitability, and returns to shareholders. With our strong capital base and solid earnings, we are able to provide strong return to shareholders year over year. We have increased its tangible book value by 10% to $13.66 per share as of March 31, 2013. Also, during the first quarter, we increased the quarterly common stock dividend to $0.15, or a 30% dividend payout ratio, and repurchased $87 million of our common stock. Looking forward to the remainder of 2013, we have a strong loan pipeline, credit quality continues to improve, and we are confident that we will be able to continue to produce solid earnings quarter after quarter. With that, I will now turn the call over to Julia to speak in more details about our key successes for the first quarter of 2013. 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 first quarter of 2013, and then discuss the net interest margin and our expectations for the future. Finally, I will review the guidance we provided in the earnings release yesterday for the second quarter and the remainder of 2013. In total, our loan portfolio increased to a record $15.4 billion at March 31, 2013, an increase of $285.1 million, or 2%, from December 31, 2012. Non-covered loan balances, excluding loans held for sale, increased 3%, or $416.2 million from December 31, 2012. As expected, covered loan balances decreased from year-end, a reduction of $183.3 million or 6% quarter to date. Overall, our ability to grow our total loan portfolio quarter after quarter stems from our strong pipeline and origination channels across multiple business lines. We have consistently been able to derive strong loan growth from single-family loan originations from our retail branch network, and both commercial real estate and commercial and industrial loans from our commercial lending officers. Our single-family loan portfolio grew $147.6 million or 7% in the first quarter of 2013, a continuing of strong demand we have experienced for the past several quarters. During the first quarter of 2013, we originated about 650 loans totaling $265 million, with an average loan size of $400,000 and an average loan-to-value of 56%. Our single-family loan originations are all from our retail branch network. As previously mentioned, our underwriting criteria for single-family loans are very high, and we require very high down payments and low loan-to-value ratios. Historically, the credit quality for our single-family loans has been outstanding regardless of real estate cycles, and we attribute this largely to the high down payment requirements. The pipeline and demand for single-family loans remain healthy, and we expect to continue to see strong originations throughout the remainder of 2013. Additionally, we experienced good growth for commercial real estate and commercial and industrial loans, which increased by $110.4 million or 3%, and $49.5 million or 1% respectively. As Dominic mentioned, the growth in the commercial and industrial loans for the first quarter of 2013 was lower than the fourth quarter. However, for this sector as well, we have a very strong pipeline and expect to see stronger growth in the second quarter and for the remainder of 2013. Although the growth in the non-covered portfolio is offset by expected reduction in the covered loan portfolio, at this point, we believe that we can grow the total loan portfolio by $200 million each quarter for the remainder of 2013, or approximately 6% for full year. Next, I would like to spend a few moments discussing the net interest margin and net interest income for the first quarter and our expectation for the remainder of 2013. Net interest income, adjusted for the net impact of covered loan dispositions, totaled $184.6 million for the first quarter of 2013, a decrease of $13.8 million from $198.4 million in the prior quarter. The decrease in the net interest income quarter to quarter was largely due to the lower accretive income on loans accounted for under ASC 310-30. As discussed in the prior earnings call, this can vary quarter to quarter, depending on the cash flow activity that has occurred. However, given the smaller size of the covered loan portfolio and the net accretable income remaining, we do expect that the benefits to our net interest income will be reduced for the remainder of 2013 and over time. The core net interest margin, excluding the net impact to interest income of $24.7 million resulting from covered loan activities and amortization of the FDIC indemnification assets, totaled 3.62% for the first quarter of 2013. This compares to a core net interest margin, excluding the net impact of interest income of $46.5 million resulting from covered loan activity and amortization of the FDIC indemnification assets of 3.84% for the fourth quarter of 2012. The decrease in the core net interest margin and net interest income for the first quarter of 2013 compared to the fourth quarter of 2012 is due to the decrease in accretable income from covered loans and the continued downward repricing of the investment securities and loan portfolios as a result of the extended low interest rate environment. On the funding side, we continue to actively take opportunities to reduce our overall funding costs and higher cost time of deposits. The cost of funds decreased four basis points to 60 basis points in the first quarter of 2013, from 64 basis points in the fourth quarter of 2012, largely due to the reduction in the cost of deposits from 40 basis points in the fourth quarter down to 37 basis points for the first quarter of 2013. Lastly, I would like to provide a brief summary of our guidance for 2013. As in the past, in our earnings release yesterday, we provided guidance for the second quarter and full year of 2013. Yesterday, we reaffirmed the guidance provided earlier in the year, and we estimate that fully diluted earnings per share for the full year of 2013 will range from $2 to $2.04, an increase of 6% to 8% for $1.89 for the full year of 2012. For the second quarter of 2013, we estimate that fully diluted earnings per share will range from $0.50 to $0.51 per diluted share. With that, I would now like to turn over the call to Irene to discuss the first quarter 2013 financial results in more depth. Thank you very much, Julia, and good morning to everyone. I'll spend a couple of minutes discussing the financial results for the first quarter of 2013, specifically as it results to credit quality, non-interest income, and non-interest expense. Starting with credit quality, we're pleased to see that net charge-offs on the non-covered loans were down substantially, totaling only $540,000 for the first quarter of 2013 as compared to $9.6 million in the fourth quarter of 2012 and $10.3 million for the first quarter of 2012. Additionally, the total non-performing assets, excluding covered assets, the total assets ratio has been under 1% for over three consecutive years, with non-performing assets of $159.5 million or 69 basis points of total assets as of March 31st, 2013. Non-performing assets increased 13% from December 31st, 2012, largely due to an increase in non-accrual loans. The increase in non-accrual loans was really specifically due to one C&I loan which matured and was delinquent as of March 31, 2013. We expect full payment of both principal and interest on this fully collateralized loan and expect it to be resolved in this coming quarter. For the first quarter of 2013, the company recorded a reversal of loan loss provision for non-covered loans of $762,000, as compared to a provision for loan losses of $13.8 million and $16.5 million for the prior quarter and prior year period. East West continues to maintain a strong allowance for non-covered loan losses of $228.8 million or 1.85% of non-covered loans receivable as of March 31, 2013. The reduction in the provision for loan losses and the allowance for loans ratio is due to better credit quality, with resulting improvements in risk ratings for loans and reduced net charge-offs. During the first quarter of 2013, the company also reported a provision for loan loss of $3.1 million on covered loans outside of the scope of ASC 310-30 and $2 million on covered loans within the scope of ASC 310-30. As these loans are covered under loss-share agreements with the FDIC, for any charge-offs the company may incur, 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. Overall, we expect credit quality to continue to improve and estimate that the provision for loan losses will approximate $2.5 million-$5 million per quarter for the remainder of 2013. Moving on to non-interest income and expense, East West reported non-interest loss for the first quarter of 2013 of $2.1 million, an improvement from non-interest loss of $18.5 million in the fourth quarter of 2012, and a decrease from non-interest income of $21.7 million in the first quarter of 2012. This improvement of the non-interest loss from the prior quarter and the decrease from the non-interest income for the prior year is primarily attributable 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 $24 million in the first quarter of 2013, a decrease from prior quarter, but an increase from the prior year period. The decrease in fee income during the first quarter of 2013, as compared to the fourth quarter, was largely due to decreases in loan fees and fees earned on interest rate swaps entered into by our customers. In the fourth quarter, we had experienced higher than expected fee income from both loan fees that were non-recurring in nature and higher volume interest rate swaps entered into by our customers. Moving on to non-interest expense. Total non-interest expense for the first quarter, excluding amounts to be reimbursed or payable by the FDIC and prepayment penalties on FHLB advances decreased to $96.4 million, or by 2% from the fourth quarter of 2012, and by 5% from the first quarter of 2012. This decrease was largely due to lower credit cycle costs. Credit cycle costs, which include REO expense, loan-related expense, and legal expense, decreased to $7 million for the first quarter of 2013 as compared to $12.5 million for the fourth quarter of 2012, and $22.5 million for the first quarter of 2012, which are included in non-interest expense. Finally, as stated in the earnings announcement released yesterday, East West Board of Directors has declared second quarter dividends on the common stock and Series A preferred stock. The common stock cash dividend of $0.15 is payable on or about May 13, 2013, to shareholders of record on April 26, 2013. The dividend on the Series A preferred stock of $20 per share is payable on May 1, 2013, to shareholders of record on April 15, 2013. Yesterday, we also announced the mandatory conversion of all Series A preferred stock as of May 1, 2013, at the option of the company. The Series A preferred stock will be converted into approximately 5.6 million shares of common stock at a conversion ratio of approximately 65.13. I'll now turn the call back to Dominic. Thank you, Irene. I will now open the call to questions. Thank you. To ask a question, you may press star then one on your touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Our first question comes from Jennifer Demba at SunTrust Robinson Humphrey. Thank you. Good morning. Good morning. Two questions. One, can you just talk about the source of your commercial loan growth this quarter by industry or niche? Secondly, obviously you have experienced more net interest margin compression than we were probably guessing you would. I am just wondering what you foresee in the future as the offsets to that pressure as we go forward, whether it be from a revenue or expense side or credit cost side. Thanks. Go ahead. Jenny, when we look at kind of the C&I loan growth, I think that was the first question that you had. It is pretty mixed in different industries. We had some good growth as far as some kind of in the industries of entertainment, also in some trade finance areas as well, but really and then also a little bit of manufacturing as well. So it is pretty well diversified. Granted, obviously we had talked about this before. There was such a pull forward in December. The net increase of only about $50 million is lower than in the past. But if you compare that along with the increase we had in the fourth quarter overall the growth is there. In terms of the NIM, eventually it is strong loan growth to replace the excess liquidity from investment securities to loans will eventually produce the higher net interest income. This quarter compared to last quarter, the reduction, a lot of it really had to do with less accretion compared to the fourth quarter. We talked about that in the call last quarter as well, that we had more accretion than we had anticipated. Thank you. Our next question comes from Joe Morford at RBC Capital Markets. Thanks. Good morning, everyone. Good morning. Good morning. I guess first just was curious if your 2013 guidance of $2-$2.04 includes any of the savings from the preferred stock conversion? No, because the preferred is just a dividend below the line. Below the line. Yeah. The EPS already included the conversion. So there's very little impact. Yeah. On the EPS. But you won't have a preferred dividend in the second half of the year, is that correct? Correct. Right. Yeah. Okay. The share count is already included in our diluted share count. Right. Okay. It's already included for that one. Then the other question is, I guess looking at the outlook for $200 million of growth on a quarterly basis, assuming kind of a continued runoff in the covered portfolio at current pace suggests that the growth in the non-covered portfolios may be now expected to be in the low double-digit range versus the high single-digit range that you had talked about previously. Is that right? If so, what's driving that increased confidence now? Yeah. We do think that the $200 million increase per quarter is very doable. We see a pretty strong pipeline, and that's why we are comfortable. Across the board, the C&I, commercial real estate, single family. So we feel pretty comfortable with our guidance of $200 million net increase per quarter. Okay. Thanks so much. Our next question comes from Aaron Deer at Sandler O'Neill. Hi. Good morning, guys. I just wonder if you have any sort of update that you can provide on how you've been thinking about the new qualified mortgage rules. I know this was discussed a little bit on the prior quarter call, and if you've given any thought to how you might evolve your existing residential mortgage product to meet your customers' needs. Well, so far, obviously, at this point, we continue to get update from CFPB, and we feel pretty confident that I think what we're doing right now is most likely going to be okay going forward. I think that the regulation's evolving, and we can also adjust to whatever the final regulation, whatever the rule is. We have good conversation with CFPB so far, and everything seems to be moving along just fine. We have every reason to believe that we will be able to continue to serve this population of customers, which is really important because not only many of those first generation immigrants who have hard time to get credit from other traditional bank that requires many years of financial information and so forth. But on top of that, I think that, as we have indicated throughout these different calls, that our loan to value, say, right around the 50 percentile. We have hardly ever had any losses from this portfolio. So we will continue to make sure that we will do everything we can to provide this type of product and service available to that segment of population. That's great. It sounds like you're pretty confident about the pipelines and the outlook for loan growth. Is any of that strength coming from the Greater China market, or is that still a pretty modest contributor to the originations? Yeah, the Greater China, we're always going to be modest for the fact that our strategic direction have always been leveraging our know-how, knowledge, and expertise about U.S.-China trade investment, and then so forth, to attract business mainly in U.S. A good example will be, there will be a lot more business that we do with Chinese company from China who are making acquisition in U.S. or who are actually starting their new business in U.S. And there are also new immigrants from China who established their new homes in the United States, and that's why we actually were able to do a lot of residential mortgages for these newcomers who are putting substantial amount of down payment for acquiring home, acquiring commercial real estates, acquiring apartment buildings. You got that segment going on, and then you have this international trade, our traditional import customers here, and then also our expanding export customers that we are having more and more of the U.S. companies, whether they are from various industries, and exporting their goods to China. We will continue to focus on this type of business. Now, the great thing about it is that we are also have the capability and capacity to originate loans either in U.S. dollars or in Chinese currency, in China. And also, of course, we have the Hong Kong branch. And having that flexibility and allow our customers in U.S. that do business in China, they can have accounts open in Hong Kong office or maybe now Shanghai office. And in the same way for these Chinese companies who are now doing business in U.S. to have their accounts transferred from our Shanghai branch to our either Los Angeles or Boston or Atlanta office. It just make life so much easier for them. But there was never once that we had a strong desire to sort of conquer the China market. That's why we're not there to open retail branches, and we're not there to look into whether it's debit card or credit card business for the retail customers. We're not there originating mortgage loans to the Chinese home buyers. That's just not the kind of business that we are interested to do. We are very much interested into our specific niche, which as of today, there really isn't too many banks in the U.S. who are sort of exclusively focusing in this direction. We feel that there will be plenty of business, from high tech to clean tech, from agriculture to aviation, and from the traditional manufacturing, trade, real estate, hospitality, et cetera. There's going to be a lot more of those kind of business going on between U.S. and China. And we think there are plenty of those that will be available for us to take because, apparently, as of today, even our competition, either they're not interested, or they don't know enough about it, or if they do, they are only looking at it as a minor element of their focus, and therefore, just cannot get good at it. And this is something that we are going to continue to focus on, and I think that's the reason why it's driving business to us, even though overall, U.S. economy is relatively slow at this point. That's great. Thanks, Dominic. You're welcome. Our next question comes from Brett Rabatin at Sterne Agee. Hi. Good morning, everyone. Good morning. Wanted to get a little more color, if I could, around just loan origination rates and the various portfolios. The bottom line I was hoping to get maybe where your average origination was for the portfolio in the quarter, or if you want to do it from more of a bottom-line perspective, what you are doing in terms of C&I and commercial real estate production. The average new origination is close to about 4%. Some of them are higher. The single family, around 4.5%. Commercial real estate, C&I, some of them close to 4% or high 3s. I would say that is about the new originations in terms of the yield. In terms of the commercial real estate especially, has the competitive landscape changed with the real estate market in Southern California, and where is the commercial real estate growth coming from? Well, I think that in terms of commercial real estate, from a banking industry point of view, there are a lot more competition, and pricing is getting challenging, simply because many of the smaller community banks finally get out of the MOU or C&D, and the first line of business that they're comfortable to work on usually are commercial real estate. We're seeing more of that coming up. In addition to that, larger banks, these big banks that in the past had not been interested in smaller commercial real estates are now also jumping into the hunt for commercial real estate. Our advantage that we have is that, as I talked about it earlier, when we have some pretty interesting exclusive relationship with some of these customers, let's say, from China or Southeast Asia, looking into opportunities of acquiring some good assets in U.S., many of them, because of our assistance, they are very much interested to look at East West as the exclusive lender to help them. In that regard, we do not have to be out there putting out a bid against 10 other banks and then see which one is cheaper. That's the second thing, is that helping our longtime Southern California or even Northern California customers to acquire commercial real estate in a competitive environment. Many of our loyal customers wanted to rely on a bank that will come through for them. That is that if they have a 30 days escrow, or if they have a 25 days escrow that they need to close, they need the bank to come through. As much as there may be 10 different bids out there from different banks that all want to be in this space and willing to go much lower price, et cetera. Many of these banks may not necessarily have the credibility. They may be able to perform, but it takes our borrower to feel comfortable to take that risk. Many of them just not comfortable to take that risk. They much rather deal with East West because East West has been with them for many years. I think to that regard, I think you can look at, we do have a pretty sizable commercial real estate portfolio, which equate to sizable commercial real estate customers. Many of them actually are pretty pleased with our services. Therefore, when they start getting active into making acquisitions, invariably, they come to us first. We're always going to get our share of the business. In terms of a very dramatic growth, no, because it's not like we're out there and trying to kill everybody in terms of capturing the market share. We just want to make sure we continue to maintain and get our fair share. So far, we've been doing that. Okay. Appreciate the color. Thank you. Our next question comes from Herman Chan at Wells Fargo Securities. Thanks. What are your expectations for balance sheet growth over the next few quarters? It sounds like the balance sheet growth with increased liquidity in Q1 was greater than maybe your initial forecast? It would be stable. The balance sheet growth will only come if we have a major increase in deposits. Otherwise, it will be pretty stable, and then we're just redeploying the excess liquidity from investment to loan portfolio. Got it. I'd like to get some color on loan originations throughout the quarter. Did you see some more activity from an origination standpoint as the quarter progressed? We hear from banks, saw a greater level of activity in the March timeframe relative to earlier in the quarter. Herman, we experienced that as well, especially with the surge that we had in December. January was a little slow, and it picked up throughout the rest of the quarter. Got it. Thank you very much. Our next question comes from Dave Rochester, Deutsche Bank. Please go ahead. Hey, good morning, guys. Good morning. Just on the provision, you mentioned a lower provision level going forward, but it sounds like you expect to be growing the loan book pretty decently. Just wondering what your all-in reserve ratio was on that new production, if it's generally over 1%, maybe like a 1.2 or 1.3? I don't have that exact ratio, but I would say probably it's still a little over 1 still at this point in time. The thing is, overall, charge-offs have come down, our loss rates have come down, and also the risk rating on the loans have improved. So what you're having is a situation where we're moving out like a substandard loan, hypothetically, at a 20% kind of loss rate to then put on pass loans 1%, a little over 1%. So that's where that dynamic is coming from. If you are reserving for new production at that 1% to maybe 1.1% type level, I guess the reserve ratio itself could bottom out maybe a little bit higher than that because you may have still some classified stuff in there as well. Correct. Yeah. Got it. A little higher than, yeah. And what we have seen is that real estate values across the board, whether it is commercial real estate, multifamily, single family, have really firmed up and increased. We do not expect much charge-offs from the real estate portfolio. As you know that we have been very aggressive in charging off to the most recent appraisal. Hopefully we will not have much charge-offs coming from the real estate portfolio going forward. Right. Got it. Thanks. On the resi portfolio, can you talk about where most of that growth came from? Was it new home purchase volume in Orange County or L.A. that primarily drove that? Yes, mostly in California, Southern California, Northern California, and mostly home purchases. Okay. Thanks for that. Just one last one. Is there any thought to reloading the buyback before year-end, potentially, depending on what growth is and what the market's doing? Well, at this time, we have that $200 million authorized, and we have like $120 million remaining. So we'll finish that, and then we'll see how the market, and we'll have the discussion with the board if we want to increase that or not. But at this time, we'll continue with our program to finish the $200 million authorized buyback. Do you guys have an internal target for Tier 1 common or maybe total risk-based capital that you want to manage to longer term in terms of a ratio? Our internal guidelines is the total risk-based minimum about 12.5%, so that we have plenty of room against the 10% well capitalized. Most likely, 13.5% total risk-based would be more than adequate for us. But at this time, we are in excess of 15%, so we have very strong capital. Yep. We want to take a measured approach, too. I think that that is kind of the level. Obviously, our levels are much higher than that at this point, but that doesn't mean necessarily we're going to get down to that. Right? Yeah. Well, the other thing is that as of today, with a very high capital ratio, we're still cranking up very nice return of equity. So the fact is, that's why we can just be very prudent to look at the overall market and have discussion with our board before we sort of take too quick of a move of any kind of buyback. But that's something that, you know what? At the end of the day, management and our board are pretty much in alignment with our shareholders in terms of making sure that we got a very decent return for our shareholders. If there are capital that we do feel that it doesn't make sense to stick around, then we have plenty of cushion, and there is not much potential acquisition in sight, you bet that we're going to return our cash back into shareholder in a decent pace. All right. Great. Thanks, guys. Our next question comes from Gary Tenner at D.A. Davidson. Good morning. I had a follow-up on the question about the provision expense guidance for the year. It's down anywhere from 50%-75% from the previous guidance, so pretty significant change. You talked about some of the parts there, but I guess I'm really curious what you've seen over the last 90 days, particularly that led you to reduce the guidance there. Overall, Gary, I would say the guidance reduction is a function of the improvement that we're seeing in the credit quality. As Julian mentioned, with the real estate portfolio, we're not seeing that kind of continuous reduction in real estate values. In fact, they've improved. We're also not seeing really an increase in problem loans. So when we look at the rest of this year, occasionally something may happen, particularly maybe with the C&I loan because that can happen, but especially with the real estate market and our real estate portfolio, we're not seeing kind of a further decline in deterioration and credit quality. That really is the driver for the guidance reduction. Okay. Thank you. Our next question comes from Julianna Balicka at KBW. Good morning. Good morning. I have a couple questions. Thinking about your core net interest income, excluding accretion, which I believe you have $80 million left to accrete over time. Excluding that, when you think about the volume in loan growth and earning asset growth versus the pressure on asset yields, are you thinking about increasing your core NII for the rest of the year or are you thinking that this is a flat to down number and then your increased earnings and/or flat earnings will come from better expenses? Right now, we think the NII for the remainder of the year would be flat, because the loan growth will offset the slightly decrease in accretion per quarter. But cumulatively, over time, the NII will increase because of the loan balances that are yielding higher than the investment securities. Just to make sure I heard you correctly, you think that the loan growth will offset the decline from repricing and accretion? We think about stable, yeah, for the remaining of the year, the $184 million NII. Okay. Okay. Secondly, going back to the balance sheet growth question that was asked a little earlier, your deposit growth continues to be good. So in terms of what you're thinking about your internal assumptions on your ongoing deposit growth for the rest of the quarters, what kind of growth rate are you building in? We're expecting very small growth. The last couple of quarters, we experienced very high growth in the deposits. But I think that should be moderating. There'll be some runoff on the deposits for people to pay property tax, income tax, and just the fluctuation. But we'll have some increase. We don't expect that the deposits will grow that much for the remainder of 2013. Okay. All right, great. Thank you very much. Our next question comes from Matthew Clark at Credit Suisse. Hey, good morning. First on the loan yields, can you give us a sense for, I think on the non-covered loan yield side, I think they were up in the fourth quarter a little bit. Can you just give us a sense for what maybe unusual items might have been in the fourth quarter, and if you strip them out, what the trend in loan yields look like this quarter? Yes. Matthew, this is Ivy. When we were on the call for last quarter, we mentioned there was kind of unusual item for our China portfolio, which is part of the non-covered portfolio. That's why the yield went up in the fourth quarter, especially if you compare it to the third quarter too, because in this kind of environment, it's unusual to see an increase. So, the impact of that was probably about $5 million for the fourth quarter. So if you factor that in, the kind of reduction from the fourth quarter to the first quarter wasn't as severe as it looks from the GAAP reporting perspective. Okay. So the pricing pressure may have eased, I guess, one quarter. That's something we are definitely seeing with the loan portfolio. Granted, given the extended low rate environment, loans are repricing downwards, but the repricing, the impact of it is less and less. Okay. On the provisioning, calling for about $10 million-$20 million, I guess, this year. I think most were probably looking for 35. Is that something that you think might be sustainable as we get into 2014 given that credit continues to improve? At this point, I would say that that's likely. Okay. Then finally, on the SBA loan sale front, can you just talk about that business and whether or not we might see you guys start to take some gains maybe next quarter into the second half to help fees? I'm sorry, which loan sale? SBA. SBA. That's something that we may take a look at. We have pretty good origination in SBA. But that's something we'll evaluate next quarter, this quarter. Okay. Thank you. Our next question comes from John Pancari at Evercore Partners. Yes. Back on the QM topic, did you indicate last quarter that the low doc, no doc loans are going to be prohibited by the regulators from being originated at all after January 2014? Well, as the regulation come out, it will be a non-QM if you do not follow all the debt to income and the verification. We are following, but it is not prohibited, but it will be a non-QM. So non-qualified mortgage. Yeah. Non-qualified. Yeah. There are certain criteria you have to make in order to qualify as a qualified mortgage from the CFPB standard. But anybody can make a loan, but it can be either qualified or non-qualified. So at the worst case scenario, we will be non-qualified. Okay. Now that helps clear it up because we just wanted to see if it is going to still be permitted in any fashion, but just not qualified. Okay, that is helpful. Yeah. That's correct. Yeah. Mm-hmm. Okay. Being that it's not going to be qualified, I know that should not impact you too much because you're just going to be putting this paper on your own books as you have been. Does that impact at all the cost of origination, the legal cost that you need to factor in, or the pricing or even the reserves you take on this going forward? In other words, to sum it up, does it impact the profitability of this product at all? Well, not in a significant way in terms of the additional cost, but the risk would be that somebody can come back and say, "This is not affordable because it's non-QM." It's something that we have to consider, what kind of risk that we are taking on that non-QM. Yeah. I think normally, just look at it as a hypothetical situation. Someone put 5% down and bought a home because the builders or maybe the brokers or maybe the bank, they talked them into such a sweet deal, and then they got into it, and later on, the price came down, or maybe they lost a job, or whatever. They said, "You know what? I should have never bought this house. I want to get out of it." If you are non-qualified, from a legal point of view, you are in a much weaker position from a CFPB position. Our customer normally puts 50% down to buy a house, and I do not know under what circumstances a person want to put, let us say, $500,000 to a $1 million home, and then six months later decided that, "I got the wrong mortgage." I think those are kind of things that on one hand, from a legal point of view, from a theoretical point of view, it may sound like, well, there may be a lot of risk. Quite frankly, to a lot of lenders, that is a lot of risk because they specialize in very low down payment mortgages and with a lot of heavy underwriting on documents like tax returns, financial information. We predominantly focusing on how much cash down that person put in, and we predominantly focusing on purchase, and also purchase for not investors. Not investor buying five homes, 10 homes. We focus on helping an investor to buying a home as a primary residence. In general, how on earth somebody who just sunk in that much of a down payment to do get that true American dream and then somehow wake up one day and say, "You know what? I want to move out of here" and then give that loan back to East West Bank. If they do, what is the damage? Still going back to that, if they do, what is the damage? We get our loan back. Well, every day there are people refinance, so I do not see there is much issue much at all. It is one of those things that I know that in general, that may be very applicable to a lot of banks. From an East West point of view, we do run into a very different kind of direction, just like our focus on U.S.-China business or our focus on these type of mortgages. That is why we feel pretty comfortable that one way or the other, we are going to be fine. Okay. That is helpful. Lastly, on the margin, can you just remind us what surprised you when it came to the margin results for this quarter? I think you indicated that was mainly around the covered loan yield. Is that primarily where you were surprised, or was there greater compression in the non-covered book than you thought you were going to see when it comes to loan yields? Couple things. We did expect more accretion because we have had more accretion every quarter for the last few quarters. That was a little bit of a surprise. Additionally, we did have an increase in the average earning assets due to the increase in the liquidity. Those two were the impact and the drivers from the decrease in the NIM compared to our guidance. Yeah. The accretion is predominantly, obviously, on the FDIC cover loans, the UCB acquisition loans. That can fluctuate up and down, and it's hard to predict. In fact, it's quite a miracle for the last two or three years that we somehow have not seen much too big of a fluctuation that vary from our expectation. I think that this may be one of the very few isolated quarter that we actually had an expectation of certain dollar amount accretion, but the activity in these FDIC cover loans has been such that simply do not give much accretion. Therefore, I think throw the margin off a bit, in addition to the excess liquidity coming from significant amount of deposits coming in due to the various reason. With that, the excess liquidity, obviously, with us generating, yielding asset at like 1.5% or so for these investment securities, obviously, have put that margin down a little bit. I think that the likelihood of this type of unusual exception in the accretion may not be as high going forward. Okay, great. Thank you. As a reminder, if you would like to ask a question, you may press star then one on your touch-tone phone. Our next question comes from Mike Turner at Compass Point. Hi, good morning. If we stay in this low rate environment, say for another year and a half, what are your thoughts on refinancing your repo funding? Well, because of the prepayment penalty and the optionality is quite expensive, so most likely, we would not be. This is on the repo, right? This is on the liability, on the repo liability? Yeah. I think you have about 900 or almost $1 billion. Mike, I think that would be too expensive, like a- It's a payoff, but there are ones that over the course of the last few quarters we have restructured, Mike. Okay. Mike, I'll walk you through the details of that, but Julia is mentioning the payoff, and that is something probably we're not going to do. Okay, thank you. My next question comes from Brett Rabatin at Sterne Agee. Hi, I just had two quick follow-ups. I was hoping to get maybe a little more color around the expenses going forward in terms of opportunities to lower those, where that might be coming from. Then also, Dominic, you talked more positively maybe about M&A last quarter than you had previously. I was just hoping to get maybe a really quick update on how you view the M&A market. Well, I think the M&A market is very positive for our investor from China. But in terms of East West, at this point, I would say that I haven't seen anything in the horizon that would get me overly excited. Well, I think you may have heard the comment that I had earlier that we will return our cash back into shareholders soon once we decided that there is not much M&A in the horizon. That is something that we obviously, we're on ongoing basis. We will always have this dialogue with the board, and there are always going to be opportunities that were presented to us on a monthly basis from various parties out there in terms of potential acquisitions. As you have seen so far, we haven't really bought anything for the last two years. At this stage, I would say that in general, I wouldn't make any comment if there will be anything exciting that we may need to sort of preserve capital to be deployed for some major acquisition. Not at this stage. Brett, on your question about the non-interest expense. Overall, we do expect this to trend down, but with our guidance, sometimes some quarters, there is something that happens, especially with the credit cycle cost. I would say, the increase quarter-over-quarter was largely in the comp, and that has to do with the payroll taxes. That should kind of even out over the year. Overall, I would say from a core operating perspective, probably not a huge amount of reduction throughout the year, but on the credit cycle cost side, we do expect to see some reduction. Okay. Maybe to ask it another way. Let's just assume you're talking about stable core spread revenue. If that becomes difficult to maintain, I guess I'm looking for anything that you might think about from an opportunity perspective to further lower the expense base. In the long run, though, the credit cycle cost will go down. Even this quarter, we spent what, $6 million, $7 million coming from some of the problem credits in the past. That will go down in the future, but it may not be something that is immediate quarter-to-quarter. In the long run, for next year, the following year, that should go down. Okay. Thanks. Additional call. Thanks, Brett. The next question comes from Julianna Balicka at KBW. Hi. I have two follow-ups, please. Going back to the conversation that we were just having a couple of questions ago about the expected accretion versus what you realized in your NIM guidance. 90 days ago, what was the expected accretion that you were planning for the year and for the quarter? And then what was the actual accretion that you realized in your core 3.62% margin, and what is your expected accretion in your current guidance for the year? Yeah, I may have to just kind of think about your question because it was so confusing with expected and actual. But as of March 31st, we had about $80 million left of expected accretion. And as you know, in the past, the actual has been a little bit higher than the expected. The actual in the first quarter was about $20 million. And on a go-forth basis, we're tapering that down and expecting $15 million all in every quarter. Okay. So in your current guidance for the $350 million to $360 million, you're looking at $15 million per quarter accretion for next three quarters. That's right. Approximately $15 million. And 90 days ago, you were looking at $20 million per quarter? We were looking at a higher number. That's right. That was my question. What was that higher number? Yeah. About 25, 20, 25. It's a bit higher. It's a range. And tapering down throughout the year. That's why we had a higher guidance earlier. Okay. That makes sense. The other area that I want to follow up was in terms of your securities gains. How should we think about that on an ongoing basis? You used to do fairly regularly securities gains, then you switched to student loans. Are you switching back to securities gains? What are your thoughts there? Our strategies on the investment securities, especially the mortgage-backed, it is better to monetize the gain because if interest rates go up, the gains go away, and if the interest rates stay low, there will be a lot of refinancing on that mortgage-backed security. Based upon that, we think that for this year, if rates stay, most likely we will try to monetize the mortgage-backed securities. Uh-huh. Okay. The pace that you did in terms of gains, obviously that fluctuates, but roughly within this first quarter, was this quarter just like a bumper catch-up? I think that it is roughly about this quarter, about $5 million gain is what we are expecting. Okay. Very good. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks. Well, I just want to thank everyone for joining us on the call, and I look forward to speaking with you in July. Thank you. The conference has concluded. Thank you for attending today's presentation. You may now disconnect.