Earnings Call: Q3 2012

Oct 18, 2012

Good morning, and welcome to the East West Bancorp third quarter 2012 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 Ms. Kelly Adams. Ms. 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 2012. Here to review the results are Dominic Ng, Chairman and Chief Executive Officer, Julia Gouw, President and Chief Operating Officer, and Irene. 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, 2011. Today's call is also being recorded and will be available in 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 for joining on our earnings call. East West reported healthy earnings of $71.1 million, or $0.48 per diluted share for the third quarter of 2012. Our net income increased by $8.7 million, or 14%, and our earnings per diluted share increased $0.07, or 17% from the prior year period. As compared to the prior quarter, East West grew earnings by $553,000, or 1%, and increased earnings per share by $0.01 or 2%. Our steady financial performance in the third quarter was driven by healthy growth in our loan and deposit portfolios, which resulted in increased total revenue, net income, and earnings per share from both the prior quarter and prior year period. Our third quarter net income of $71.1 million was the highest in the last 11 quarters, resulting in a solid return on assets of 1.3% and return on average common equity of 12.43%. We grew our non-covered loans, excluding loans held for sale, by $360.3 million or 3% quarter to date. This increase in our non-covered loan portfolio was primarily attributable to growth in commercial and trade finance loans, commercial real estate loans, and also single-family loans. The growth in commercial and trade finance loans in the third quarter is the continuation of strong momentum from the first half of 2012. Year to date, we have grown our non-covered commercial and trade finance loans by $590.3 million or 19%. In the third quarter of 2012, we continue our focus on attracting low-cost core deposits. As of September 30, we reached record levels of both total deposits and core deposits of $17.7 billion and $11.4 billion respectively. I am pleased to state that once again, the strong growth in core deposit was fueled by an increase in non-interest bearing deposits. Again, as of September 30, we had $4.1 billion in non-interest bearing demand deposits, totaling 23% of our total deposits, the highest ever in the history of the bank. Although the low interest rate environment and economy continue to be challenging for our industry, East West continues to perform well and outperform many of its peers with higher growth, profitability, and returns to shareholders. As a financial institution focused on the U.S. and Greater China markets, we have an inherent competitive advantage over our peers in winning new customers and retaining existing customers who need our expertise, services, and operating platform between the United States and Greater China region. Our strong growth in non-covered commercial and trade finance loans in the third quarter and over the last several quarters is indicative of this advantage over our peers. In summary, we believe that our strong results during the third quarter and year to date will continue through the remainder of 2012, resulting in another year of record earnings for East West. Not only have our net income and earnings per share increased, the year to date tangible book value is also up 7% to $13.07 per share. Additionally, we have returned $243 million back to shareholders in the form of common dividends and the repurchase of common stock in the first nine months of 2012. East West has proven that it can perform well even in challenging operating environments, and I am confident that we will continue to do so in 2013 and beyond. With that, I will now turn the call over to Julia to speak in more detail about our key successes in the third quarter of 2012. Thank you very much, Dominic, and good morning to everyone. I would like to spend a few minutes discussing in more detail the solid loan growth we experienced during the third quarter, and then discuss the net interest margin and our expectations for the future. Finally, I will discuss the guidance we provided in the earnings release yesterday for the fourth quarter and full year of 2012. In total, our loan portfolio increased $142.4 million or 1% quarter-over-quarter. Non-covered loan balances, excluding loans held for sale, increased 3% or $360.3 million during the third quarter to $11.2 billion at September 30, 2012, while covered loans decreased $238 million or 7% from June 30 to $3.2 billion as of September 30, 2012. During the first half of 2012, the steady growth in the non-covered portfolio was offset by decreases on the covered portfolio, so we were pleased to see this increase in total loans from June 30 to September 30, 2012. The growth in our non-covered portfolio for the third quarter of 2012 was driven by strong growth in commercial and trade finance loans, commercial real estate loans, and single-family loans, which I will discuss in more detail. Non-covered commercial and trade finance loans increased $314.1 million or 9% to $3.7 billion. Combined, total non-covered and covered commercial and trade finance loans increased to $4.3 billion or 30% of our total gross loan portfolio as of September 30, 2012, up from 28% of our total gross loan portfolio as of June 30, 2012. The growth in non-covered commercial and trade finance loans during the third quarter stemmed from strong growth across many sectors, including trade finance, manufacturing, healthcare, technology, and entertainment and media. Additionally, during the quarter, we continued to experience strong demand in our markets for commercial real estate loans and single-family loans. Our commercial real estate loan portfolio and single-family loan portfolio grew $74.6 million or 2%, and $47.7 million or 2% quarter to date, respectively. Total commercial real estate loans, including both non-covered and covered loans, total 35% of our loan portfolio, and we are well under the FFIEC guidelines for high CRE concentration at 258% of total risk-based capital as of September 30, 2012. As such, we are comfortable growing commercial real estate loans in the fourth quarter of 2012, and in 2013 proportionately as our total loan portfolio grows. Single-family loan originations continue to be strong. We originated 440 loans totaling $135 million during the third quarter, with an average loan size of $300,000 and a loan-to-value of 49%. Our single-family loan originations are almost entirely 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 the real estate cycles, and we attribute this largely to the high down payment requirements. Next, I would like to spend a few moments discussing the net interest margin for the third quarter and our expectations for the fourth quarter of 2012. Net interest income, adjusted for the net impact of covered loan disposition, total $196.3 million for the third quarter of 2012, an increase of $1.6 million from $194.7 million in the prior quarter. The core net interest margin, excluding the net impact to interest income of $25.6 million resulting from covered loan activity and amortization of the FDIC indemnification assets, totaled 3.95% for the third quarter of 2012. This compares to a core net interest margin of 4.01% for the second quarter of 2012. The increase in net interest income of $1.6 million from the prior quarter stemmed from the solid growth in loans, resulting in higher average earnings assets of $265.6 million or 1% quarter-over-quarter. Although we were pleased to see increased net interest income, we expected that the core net interest margin would decline from the second quarter and expect it to continue to drift downwards as the low interest rate environment continues. We are committed to ensuring appropriate and prudent interest rate risk management and are focused on balancing short-term gain today versus longer-term profitability by managing the duration in our loan and investment portfolios. We are actively taking opportunities to reduce overall funding costs and higher cost time deposits. During the third quarter, we paid off $75 million of subordinated debt, which carried a rate of 1.6%. Additionally, we reduced the cost of deposits 4 basis points from 45 basis points in the second quarter to 41 basis points in the third quarter of 2012. We are confident that we will have other opportunities to maximize our net interest margin while maintaining prudent interest rate risk management for the remainder of 2012 and in 2013. Additionally, as we look forward to 2013, we believe that there's a lot of clarity with our earnings power, and at this time, are comfortable for the full year net income in 2013 will grow from the full year of 2012. Additionally, as discussed in the second quarter earnings call, with our strong profitability and capital levels, we expect to submit to the board our 2013 budget and strategic plan in early January 2013, which will include another $200 million stock buyback and a 50% increase in dividend to $0.60 for 2013. Lastly, I would like to provide a brief summary of our guidance for the fourth quarter of 2012. As in the past, in our earnings release yesterday, we provided guidance for the fourth quarter of 2012 and the full year of 2012. We currently estimate that fully diluted earnings per share for the full year of 2012 will range from $1.87 to $1.89, or an increase of 17%-18% from our earnings per share of $1.60 for the full year of 2011. This updated guidance for the full year of 2012 is also an increase of $0.03 from our previously released guidance in July. We currently estimate that fully diluted earnings per share for the fourth quarter of 2012 will range from $0.47 to $0.49. With that, I would now like to turn the call over to Irene to discuss our third quarter 2012 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 2012 in more detail, specifically as it relates to credit quality, non-interest income, and non-interest expense. Starting with credit quality, we are pleased to see that asset quality metrics continued to improve in the third quarter of 2012. Non-performing assets declined to $144.1 million as of September 30th, 2012, a decrease of $11.6 million or 7% from the prior quarter. Total net charge-offs on non-covered loans also decreased to $10.6 million for the third quarter of 2012 from $11.7 million in the second quarter of 2012. Additionally, non-accrual loans excluding covered loans decreased to $104.1 million as of September 30th, 2012. Total non-performing assets excluding covered assets were down to 66 basis points of total assets as of September 30th, down from 72 basis points of total assets as of June 30th, 2012. The provision for loan losses for non-covered loans declined to $13.3 million for the third quarter of 2012, a decrease of $3.3 million or 20% from the prior quarter, and a decrease of $9 million or 40% as compared to the third quarter of 2011. East West continues to maintain a strong allowance for non-covered loans at $223.6 million or 2% of non-covered loans receivable as of September 30th, 2012. Overall, we expect credit quality to continue to improve and estimate that the provision for loan losses for non-covered loans will be $10 million-$13 million for the fourth quarter of 2012. During the third quarter of 2012, the company recorded provision for loan losses on covered loans of $5.2 million, resulting largely from charge-offs of $6.5 million on three covered loans outside the scope of ASC 310-30. As these loans are covered under loss-share agreements with the FDIC, the company recorded income of $5.2 million, or 80% of the charge-off amount of $6.5 million in non-interest income as a net increase in the FDIC receivable, resulting in a net impact to earnings for the third quarter of a loss of $1.3 million. Moving on to non-interest income and expense, East West reported non-interest income for the third quarter of 2012 of $2.8 million, an increase from non-interest loss of $11.7 million in the second quarter of 2012, and non-interest loss of $13.5 million in the third quarter of 2011. The increase in non-interest income from the prior quarter and prior year is primarily attributable to a decrease in the net reduction of the FDIC indemnification asset and FDIC receivables. In total, branch fees, letter of credit, and foreign exchange income, loan fees, and other operating income increased for the third quarter and totaled $24 million, an increase from both the prior quarter and the prior year period. The increase in fee income during the third quarter of 2012 was largely due to increases in foreign exchange income. In addition, included in non-interest income for the third quarter of 2012 were net gains on sales of loans of $5.3 million and net gains on sales of investment securities of $93,000. The $5.3 million gain on sale of loans in the third quarter was primarily due to the sale of $140 million in government-guaranteed student loans. Moving on to non-interest expense. Total non-interest expense for the third quarter, excluding amounts to be reimbursed by the FDIC and prepayment penalties on other borrowings, increased $1.3 million or 1% from the second quarter of 2012 to $97.9 million. The increase in non-interest expense, net of the amounts reimbursed by the FDIC and prepayment penalties on other borrowings, was primarily due to an increase in legal expense, offset by a decrease in compensation and employee benefits. Compensation and employee benefits decreased $2.4 million or 5% from the second quarter of 2012, primarily due to a decrease in payroll taxes and an increase in the offset to compensation expense from deferred loan costs due to an increase in origination volume in the third quarter. Credit cycle costs, which included other real estate-owned expense, loan-related expense, and legal expense, increased $2.1 million or 16% from the second quarter of 2012, totaling $14.9 million for the third quarter as compared to $12.8 million for the second quarter of 2012 and $15.7 million for the third quarter of 2011. Of the total credit cycle cost incurred in the third quarter, $3.8 million is related to covered loans and other real estate owned, for which we expect that 80%, or $3 million will be reimbursable by the FDIC. Finally, as stated in the earnings announcement released yesterday, East West has declared fourth-quarter dividends on the common stock and the Series A preferred stock. The common stock cash dividend of $0.10 is payable on or about November 23rd, 2012, to shareholders of record on November 9th, 2012. The dividend on the Series A preferred stock of $20 per share is payable on November 1st, 2012, to shareholders of record on October 15th, 2012. I will now turn the call back to Dominic. Thank you, Irene. I will now open the call to questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star 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 is from Herman Chan with Wells Fargo Securities. Go ahead, please. Thanks. Can you talk about the puts and takes for the margin guidance for the fourth quarter, and any preliminary thoughts on the trajectory of the margin going into next year? Well, when we look at the margin for the fourth quarter, Herman, we do see that when we look at the earning assets, we expect that to drift down. However, we see some opportunity with the funding, with the CDs, with the higher cost deposits, and also maybe even more importantly, with the growth that we've been having in the loan portfolio. When we look at the pipeline, it's very active. So when we look at the earning assets, we also see that the total volume of the loan should increase, so the mix of the earning assets should improve as well. Preliminarily, we're working on our budget and our analysis for 2013. At this point in time, when we look at 2013, we're looking at a NIM of probably for full year, 380-385, and we think that that's achievable given the trajectory of our portfolio. Great. With the pickup in CRE, can you give us some color what you're seeing from an origination standpoint? Should we get the sense that the bank is re-engaging in that particular market? What do you think from a yield standpoint, as it seems like competition is still fairly intense on the CRE side these days? Thanks. We see the CRE that we are doing right now are mostly from relationship customers. Customers that we have known for quite some time that are either buying properties or started to develop some of the properties. The pricing is competitive, but we believe that we still get pretty decent yield on those portfolio. Thank you very much. Our next question is from Joe Morford with RBC Capital Markets. Thanks. Good morning, everyone. Morning. Good morning, Joe. The commercial loan growth continues to be fairly broad-based. Are you finding customers in these various niche sectors more confident in making investments? Or broadly speaking, is it being driven more by market share gains? Along those lines, how important are you finding the ties to China in terms of winning this new business? Both. I think that in terms of a customer point of view, in terms of these loans that we are getting, originating for the last several quarters, I think mainly these are sort of like our ability to take share from the market. I think there is less of customers who are expecting a robust economy and then asking for increase in line. Most of these loan growth are getting new relationship. That's one. The other part is that, as I said, both is that the other part is that because of our exclusive focus on this U.S.-China relationship, there are a lot more opportunities for us in terms of companies from China that are coming to United States to make investments, and invariably, many of them look at East West as one of the first banks to call. We end up having less competition when it comes to that type of opportunities. Because normally, I think it will be much more challenging for us to compete for business when these are customers that everybody wants. But when it comes down to business that with investment coming from China and then having us to help them to connect, from real estate to entertainment, to sometimes clean tech area, these are the business that we have substantially less competition because of the value-added service that we provided that naturally make us the winner in terms of the banking services. It's a combination of working with business in U.S. and China, that in that niche, that actually have less competition for us, and there are also more of that type of growth that are happening in U.S. The foreign direct investment coming from China for the last few years have continued growth in an exponential way. In that regard, we would expect that even going 2013 and beyond, we're always going to get a lion's share of that type of opportunities. In the meanwhile, we continue with our industry focus, and there is industries that we have set up the right platform for the last 24 to 18 months or so, and I think that we have the ability to also go out and get market share within U.S. market. So it's a combination of these two to get us into more additional business. Okay. That's helpful. I guess the other question was just on the deposit side, Irene, you mentioned some opportunity to maybe do some things with the higher cost deposits. Your CD cost is still upwards of 80 basis points. You have a fair amount of liquidity still on the balance sheet. Are you going to start pricing those down more aggressively, or what types of things could you be doing here? No, I think, maybe not more aggressively. If you look year to date, we've continued to reduce the cost of deposits quite substantially. Early part of this year, and the latter part of last year, a lot of that had to do with the repricing downward of CD. We expect that to continue. When we look also at the mix of the deposits, we've, as Dominic talked about in the prepared remarks, the non-interest bearing DDA deposits continue to grow. As the mix changes, overall, we expect that we'd be able to continue that momentum and continue to have that cost of deposits come down as well. Okay. Thanks so much. Our next question is from Dave Rochester at Deutsche Bank. Go ahead. Hey, good morning, guys. Nice growth this quarter. Thank you. Are you thinking that this level of loan growth you have is potentially sustainable given what you're seeing in the pipeline at this point? Could we see another $300 million of growth in C&I next quarter as well, or could that actually increase from here? We have been projecting, expecting about $100 million a quarter, but given the pipeline, we do think that it will be more than that. However, the $300 million, we are very fortunate, that the third quarter is that level. We wanted to be more conservative and not expect that level of growth each quarter. I think that going forward for next year, we're looking at the net loan growth of 5% for the total loan portfolio. It will be across the board because not just C&I loans, but commercial real estate, single family will continue to contribute to that loan growth in 2013. I think from a planning perspective, I think that we have always been lean towards more prudent, conservative budget and plan. The idea is that, C&I loans is something that I know that the trend today in banking is everybody want to book C&I loans, but when the market goes south, these loans can be very challenging to manage. So we are very prudent in terms of from an underwriting standpoint, and we want to make sure that the loans that we get are high quality loans. So the one way to ensure that is to not put too much pressure from our lending team in terms of they have to crank up a lot of these C&I loans. Because unlike single-family mortgage loans, which the underwriting is a little bit more simplistic, C&I loans is a little bit more challenging. From a planning standpoint, that's what we do. But from a market perspective, I would say that we have been successfully getting favorable surprises. I also think that even in 2013, there is also a good probability we'll get favorable surprises. Because from a market perspective, we do have a niche that allow us to have more opportunities to have C&I transactions that, to a certain degree, that the credit is relatively safer and also the competition is less. As long as we continue to stay in that direction, and if I look at where we are today, I don't see there are much changes. In fact, I see even more opportunities because as I said earlier, despite the fact that the China GDP is slowing down slightly, their commitment to follow their five-year strategic plan to have more of the business to go overseas, to make foreign direct investment in places like U.S., is still very high. So recognizing that's happening, I think that we will invariably going to get more opportunities from that angle. The other thing is that, as we have more industry expertise in various other high-growth industry that related to U.S.-China trade and U.S.-China investments, we would also naturally pick up more domestic U.S. small middle market clients who understand what we're good at and naturally start aligning their business with us than with other community banks who are not focusing globally or who does not have the kind of expertise to understand what does it mean when China economy, I mean GDP now dropped to 7.4% versus 8.5%. If banks here do not understand the ramification of some of these dynamics, it does not serve their clients well if the clients are actually exporting or importing from the Greater China region. So those are kind of opportunities that we think that we will pick up more and more. While the market seems to be favorable, I think we'll continue to want to budget conservatively simply for the fact that the global economy is not very positive. What's happening now in U.S. from our fiscal policy issue and what's happening in Europe, we have to be realistic that it's not going to be a high growth economy in the next few years from a global perspective and also from a United States perspective. So in that regard, I think that net everything balance out, and that's what we're projecting. That makes a lot of sense. I appreciate that color. The 5% that you're talking about for next year, that would include, I guess, cover loan runoff as well? Correct. Yeah. Great. Just switching to the NIM real quick. Do you have a scheduled accretion in Q3, the number that is comparable to that $16 million you guys talked about for Q2, by any chance? Yeah. In the third quarter, we talk about how it is hard to predict it because the cash flow activity varies. The amount of accretion that flowed through P&L was about $25 million. So $25 million. That is right. What are you looking for next quarter that is built into your margin guidance? We think it will work out about the same. That is what we are looking at at this point in time. From this point on, it sounds like it may be just reset to a higher level, so $25 million a quarter at least through maybe 2013 or something like that? 20-25. As we have talked about this extensively, it is hard to predict, but with the activity that has been occurring in the last couple of months, it does seem to be a little bit higher. What is the amount that is still left on the books to flow through? As of the end of September, we have about $109 million of a net accretable yield. Okay, great. All right. Thank you very much, guys. Appreciate it. Our next question is from Jennifer Demba with SunTrust Robinson Humphrey. Go ahead. Thank you. Good morning. Most of my questions have been asked, but I wanted to follow up on the C&I growth line of questioning. Dominic, you said you have some pretty careful underwriting standards in these loans. Can you just talk about your tolerance in terms of size of loans and the sweet spot you're sort of trying to go after in terms of size? In terms of size, I think ideal size is from $5 million to $20 million, and that's what we've been pretty much doing somewhere around that range. Obviously, we have a lot more smaller loans. I would say that in terms of the target that we are going after are mainly from $5 million to $20 million. Occasionally, we have a few loans that we feel that the quality of these clienteles are such that we're willing to step above the $20 million loans, but very few. I would say that as an average, a size probably is less than $10 million as an average. Thank you very much. Our next question is from Ken Zerbe with Morgan Stanley. Go ahead, please. Great. Julia, I think you almost mentioned this in passing, but you said that you had opportunities to improve NIM. I was wondering, were you thinking of anything in particular, such as liability management? I mean, something more unusual other than the blocking and tackling? No, just managing on the liability side, on the deposits, and prudently look for investment opportunities. That's difficult but from time to time, something that we are very comfortable with the interest rate risk and duration. We'll continue to look at paying off the Federal Home Loan Bank advances when the opportunities come up. Nothing changes like before, and that's why you from quarter to quarter, but it is getting harder and harder. The low interest rate environment, despite of the fact that we get so much non-interest bearing DDA, which will be very good and very profitable when interest rates go up, at this point, it doesn't give us the kind of margin that it normally does. We'll continue to manage. The good thing is that at this time, as Irene have mentioned, we feel that 380 may be the floor, the bottom for 2013, as opposed to a much more severe compression of net interest margin. At this time, we feel fairly comfortable that it's 380-385 net interest margin is doable for 2013. That's on a full year basis? Correct. Okay. Just one follow-up on the C&I growth. Have you guys looked or tried to quantify in any way how much of the C&I growth of the borrowers are related in some aspect to the whole China trade versus just a core California or base commercial borrower that is not related to China? Does that make sense? We do not actually have a very clear statistics. Every time we book a loan, we classify them as California or base or related to the U.S.-China trade or investment. However, I would say that from a marketing perspective, oftentimes what we will find is that there are business that looked very much vanilla. They may be just a U.S. entity that doing banking with other community banks and then switch to us. But invariably, I would say that our expertise of knowing opportunities in Greater China and Asia region, and also our network connection with knowing the potential capital source coming from Asia are somewhat appealing to many of these clients who would like to bank with us. To that extent, I think that quite a few of our clients come to us is from that direction. The other part will be, once we get clients that may initially come to us because of our ability to understand the export or import side of doing business in China better, they have their friendly either clients or competitors, that sometimes they will be a great referral source for us to refer us to other business that may not have anything to do with the U.S.-China trade. In that regard, I think it is really a combination of continue to do good work and making sure our services deliver is more than satisfactory to our clients, and then counting on them basically one customer at a time to help us to promote and spread the goodwill to other prospect. We have been for the last many years at just basically using that kind of formula and direction in getting customers. Okay. Thank you. Our next question is from Brett Rabatin at Sterne Agee. Go ahead. Hi. Good morning. Was just hoping to get some clarity maybe, or some thoughts around credit leverage, especially as we move into 2013. You've got a really healthy reserve level, and credit continues to obviously improve. Can you give some thoughts maybe on provision versus net charge-offs past fourth quarter in terms of just how you view things trending in that perspective? That will be our earnings leverage for next year would be the provision should continue to go down, and so is the net charge-off. One of the reason why we expect next year earnings to grow is the reduction in the provision as well as some credit cycle cost that should continue to go down in the next couple years. Okay. The other question I wanted to ask was just around the residential production and that portfolio in terms of low documentation type loans, has the change in regulations, is that going to impact that portfolio in any regard in terms of either the current portfolio or the potential for that to continue growing? Well, that really depends on the regulations has not been finalized. If it passed that we are not allowed to do the low documentation, then we will not be able to continue to do that. But as of now, these are very strong quality credits that we provide to these borrowers, and we will continue to do it if that is allowed. Okay, and how much of that is the composition of that piece of the portfolio, and how much has been the growth of that? Most of the growth that we portfolio, is that your question? Most of the growth in the single-family is in this low doc, low loan-to-value mortgage loans. Okay, great. Thanks for the color. Our next question is from Gary Tenner at D.A. Davidson. Go ahead, please. Thanks. Good morning. I had a couple of questions. First on the time deposits, talking about that as a way of managing some costs next year. Could you go through the maturity schedule over the next several quarters, and also tell us what your current posted rate is for CDs? Gary, for our CD customers, generally the duration is very short. For most of the 6 months to $1 billion. So in every quarter, we have a couple of billion that come up for maturity. So there are always opportunities. I think on the posted rates, our posted rates obviously vary depending on the duration of the CD, but they are pretty competitive with the Chinese American banks. Well, I guess what I am trying to get to is, I mean, with the current CDs at 80 basis points, if they are pretty short, that would suggest there is maybe not a ton of opportunity to reduce those costs more. Is that fair, or is there more room? Well, there's still some that were higher rate. There's still some, quite frankly, that were exception price. So there still is some opportunity. I would say, compared to our ability to reduce it, let's say a year ago, the reduction is going to be less, but obviously it still makes an impact. Also not only the absolute cost of the CDs, but the movement away from kind of growth in CDs and movement to more low-cost deposits, that will help the overall cost of deposits as well. Okay, that helps. Then just a couple of line items on the expense side, and if you mentioned these, I apologize, but the comp line was down, I think a couple of million dollars sequentially, and then legal and consulting costs were both up a fair bit sequentially. Could you comment on those? Yeah, sure. On the comp line, it was down payroll. Taxes were down a little bit, and then also the deferred loan fees were up a little bit, which is the offset to comp because we had more production. On the legal, the reason for the increase quarter-over-quarter, there was a $4 million amount that we accrued for a judgment kind of against us so Okay. All right. That's helpful. Thank you. Thank you. As a reminder, if you would like to ask a question, please press star then one on your touch-tone phone. Our next question comes from Mike Turner at Compass Point. Go ahead, sir. Hi. Good morning. Just a follow-up on expenses. You've been doing a very good job of holding the line and really keeping expenses flat despite all the strong revenue growth. As we look into next year, what's your thought there? Will you be able to continue to do that? Will credit cycle costs offset normal inflationary pressures? Any thoughts there? Yeah. Mike, at this point, I would say when we look at 2013, we definitely think that the credit cycle costs will more than offset kind of the inflationary pressures of the core expenses. It's still very high, and one thing I think is hard to really see is that a lot of the credit cycle costs are still related to the covered loans. Although 80% of that is reimbursable from the FDIC, the 20%, $20 million-$30 million, is still quite substantial. So, as those loans kind of work through the process, as we have less and less problem loans because we've already worked through them, the overall cost, credit cycle cost, which for us are largely embedded in the line items, loan related costs, REOs, which is REO expenses, which is ongoing expenses, also write-downs on REOs and legal costs, we expect that to go down quite a bit next year. Then in 2014, even more so. Okay. And you said that, I guess I can back into the math, is about $20 million-$30 million a year net? Yeah. It depends because per quarter it can vary obviously. Okay, thank. Then also just on the interest income on the covered loan portfolio, it looks like it will probably come in a little north of $300 million or so this year. What is the sort of trajectory for that as we look out to next year? I know it is really kind of got an effective yield of 8% or 9%. It will continue to go down as you see that the payoff is sometimes quite fairly substantial. You will see that dollar amount will continue to drift down. As the portfolio decreases and over time there will be less accretable income, so the combination, it will come down. But as Julia mentioned, when we are looking at 2013, we are looking at total net growth in the loan portfolio of 5%, so we hope that that will help offset. Okay. Thank you very much. Thank you. Once again, if you would like to ask a question, please press star then one on your touch-tone phone. Our next question is from Julianna Balicka with KBW. Go ahead, please. Thank you. Good morning. Good morning. I wanted to ask a little about fixed and floating rate originations and your current loan portfolio. What is the breakdown of your loan portfolio between fixed and floating rate loans? How much of those have already turned over to the lower rate environment versus still hanging out at maybe some historic higher rate? Of your new originations, what is the fixed and floating breakdown? We don't have the dollar amount. That would be shown in the queues, right, in term of the repricing. In general, a lot of our loans at C&I, they are all floating. On the commercial real estate, some of them may still have a few years, but very short. If we offer fixed intermediate, maximum is 3, 5 years. Same thing with the single family. All in all, I think that our duration on the loans are pretty short, too. I think we try to, again, this is something from an East West Bank's perspective, we are really trying to be very prudent in terms of not taking much interest rate risk. For the last few years, we intentionally stay short. We intentionally also have low yield investment securities that were short just to make sure that we do not get ourself in trouble by going long on investments or maybe going long on commercial real estates or going long on residential mortgages and then getting caught when rates start going up. While interesting enough, we've been waiting for the rate to go up, it never did. So continually, we were wrong, but the nice thing about being wrong was, we had record earnings every year while we were wrong. I think we're going to continue to stay in the same position. The market today, in terms of competition, what we found is that particularly in real estate, less so in C&I because it's hard to structure a C&I loans for 10 years or 15 years. But when it comes to commercial real estates or single family mortgages, we found that many of our competitors are now putting in 15, 30 years single family mortgages and put into portfolio or maybe a commercial real estate of 10 years put into portfolio and at a very low rate. I think that that is just going to be a very slow ticking time bomb. The reason I say it's very slow ticking time bomb is assuming that Fed is not going to raise rate until after 2015. But after that, if the U.S. economy eventually start having some momentum and rate needs to start going up, I think a lot of these banks sitting on those type of loans who are never going to be refinanced because of such a low rate, is going to have some challenges. So from our perspective is that the good news is that we'd rather see a margin compression, a manageable margin compression, as long as we know that we can still grow quality earnings. So one of the things that we looked at is that the opportunity that come from East West is that besides managing the margin as well as we can, but recognizing the market is such that you cannot have it both way. That is that if we wanted to stay on 4% plus, we're going to have to take substantial amount of interest rate risk. And we looked at is that credit risk is already a big thing that we need to focus on, and we'd rather not take too much interest rate risk. So in that perspective, so we'd rather let the margin drift down a little. And still, I think that even if we come down as we expected, the next year bottom of 3.8 still substantially better than most of the banks in the country anyway. And then what we wanted to do is to make sure that to look at, okay, can we grow the volume? Are there enough market share that we can take? Are there enough business that have something to do with U.S. and China that we have a high likelihood that we getting the opportunity to bank these type of transaction and customers? And on top of that, fee incomes area. All the areas that we think that there are opportunity for us expand and get more, plus managing the expense better with the credit cost also coming down and so forth. All in all together, we think that we can grow quality earnings 2013 and beyond in a nice way. Still going to end up getting sort of earning per share growth, get us the record earnings, but not having to put too much egg in the basket in terms of something that is uncontrollable by East West Bank, which is interest rate direction. So you will be able to see that going forward, we'll continue to stay relatively short. Even these low doc loans that we're doing in residential, most of them are at 3-5 years term. We are, in that perspective, most likely not going to have much of an interest rate risk there. Great. Thank you. This concludes our question and answer session. I would like to turn the conference back over to Mr. Dominic Ng for any closing remarks. Well, I want to thank everyone for joining us for today's call, and I look forward to talk to you all in January 2013. Bye-bye. This conference is now concluded. Thank you for attending today's presentation. Please disconnect your lines.