Earnings Call: Q1 2012

Apr 18, 2012

Good morning, and welcome to the East West Bancorp first 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 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 2012. 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. First, 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, 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 all for joining us for our earnings call. Yesterday afternoon, we were pleased to report financial results for the first quarter of 2012. East West reported strong earnings of $68 million or $0.45 per diluted share for the first quarter of 2012. As compared to the prior year, East West grew earnings by $12 million or 21% and increased earning per share by $0.08 or 22%. East West demonstrated solid operating performance across a number of key areas in the first quarter. Our return on assets improved to 1.26%, and our return on equity improved to 12.01%. Our net interest margin is strong. Non-interest income is up. The cost of deposit is down, credit costs are down, and non-interest expense remains stable. By focusing on attracting and retaining sustainable and profitable clients while maintaining high credit quality and interest rate risk management, we selectively and purposely grew our loan and deposit portfolios during the first quarter of 2012. We grew our non-covered loans by $212 million or 2% and increased core deposit by $256 million or 2% to a record $10.6 billion. This increase in our loan portfolio was primarily driven by growth in our single-family residential and commercial and trade finance portfolio, which grew to $2 billion and $3.2 billion respectively as of March 31, 2012. Additionally, the growth in core deposit was fueled by a 6% increase in the demand deposits to a record $3.6 billion as of quarter end. Our strong results again demonstrate the core strength of our organization and our ability to perform well regardless of the economic conditions. East West is outperforming many of its peers in overall profitability and our ability to win new business, increase top-line revenue, and maintain strong expense control. These successes are in part due to prudent decisions and actions we have taken in the past to build a strong foundation for our organization. In the same vein, East West is currently taking actions and making investments to ensure future growth opportunities for many years to come. As in the past, in our earnings release, we provided guidance for the second quarter of 2012 and the full year. We currently estimate that fully diluted earnings per share for the full year will range from $1.78 to $1.82 per diluted share, or an increase of 11% to 14% from $1.60 per diluted share last year. Also, we currently estimate that fully diluted earning per share for the second quarter will range from $0.43 to $0.45 per diluted share. This earnings per share's guidance for the second quarter is based on the following assumptions: a stable balance sheet, a stable interest rate environment, and an adjusted net interest margin of approximately 3.9%-4%. Provision for loan losses of approximately $15 million-$20 million for the quarter. Total non-interest expense of approximately $100 million for the quarter, net of amounts to be reimbursed by the FDIC. Finally, an effective tax rate of approximately 36%. In summary, we are pleased with our operating performance in the first quarter and believe that our strong results will serve as a solid foundation for the remainder of the year. We have continued to grow our balance sheet prudently, make necessary adjustments, investments, return capital of shareholders, and grow profitability. At this point, we believe we are well on our way to record earnings for the full year of 2012. With that, I will now turn the call over to Julia to speak in more detail about our key successes in the first quarter. Thank you very much, Dominic, and good morning to everyone. During the first quarter of 2012, we focused on prudently growing our loan and deposit portfolios, appropriately balancing growth, interest rate, and credit risk, but also executing on our strategy to focus on growing long-term profitable relationships. As of March 31, 2012, total loans equaled $14.5 billion, unchanged from the fourth quarter of 2011. However, non-covered loan balances increased 2% or $212 million during the first quarter to $10.8 billion at March 31, 2012, while covered loans decreased $239 million or 6% from December 31, 2011 to $3.7 billion as of March 31, 2012. The growth in our non-covered portfolio for the first quarter of 2012 was driven by strong growth in commercial and trade finance loans and single-family mortgage loans, which I will discuss in more detail. Non-covered commercial and trade finance loans increased $96 million or 3% to $3.2 billion. Combined, total non-covered and covered commercial and trade finance loans increased to $3.9 billion at March 31, 2012, and now equal 27% of our total gross loan portfolio. As we have mentioned before, our long-term goal is to have commercial loan portfolio equal a third of our total loans. This growth in the commercial and trade finance portfolio has been achieved while maintaining strong credit quality and strict underwriting criteria, and we are pleased with the progress we have made towards our goal. In addition to the growth in our commercial and trade finance loan portfolios, we also continue to experience strong market demand for single family loans. Our single family loan portfolio grew $157 million or 9% quarter to date to $2 billion at March 31, 2012. These single family loan originations have largely stemmed from our retail branch network. As mentioned before, our underwriting criteria for single family loans is very high, and we require very high down payments and low loan-to-value ratio requirements. On the average, the loan-to-value of the loans we originated in the first quarter was 56%. 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 we underwrite to. Moving on to asset quality. We are pleased to see the asset quality metrics improved in the first quarter of 2012. For the first quarter of 2012, net charge-offs decreased significantly and non-performing assets declined as well. Total net charge-offs decreased to $10 million for the first quarter of 2012, a decrease of 53% or $12 million from the previous quarter, and a decrease of 70% or $24 million compared to the first quarter of 2011. Gross charge-offs totaled $17 million and recoveries totaled $7 million for the first quarter of 2012. Included in the recoveries for the first quarter of 2012 are $3 million of recoveries on construction and land loans and $3 million of recoveries on commercial loans. Additionally, non-accrual loans excluding covered loans decreased to $121 million as of March 31, 2012. The total non-performing assets, excluding covered assets to total assets ratio, was under 1% for the tenth consecutive quarter, with non-performing assets down to $167 million or 77 basis points of total assets at March 31, 2012. The provision for loan losses was $18 million for the first quarter of 2012, a decrease of 10% or $2 million from the prior quarter, and a decrease of 32% or $8 million as compared to the first quarter of 2011. Due to the improvement in credit quality that we have experienced, our provision for loan losses has declined each quarter for the past two years. However, East West continues to maintain a strong allowance for loan losses for the non-covered loan losses of $214 million or 2.04% of non-covered loan receivable at March 31, 2012. This allowance as of March 31, 2012, represents an increase in the dollar balance as compared to December 31, 2011, and no change in the allowance to total loans ratio. Overall, we expect credit quality to continue to improve and estimate that the provision for loan losses will be $15 million-$20 million for the second quarter of 2012. In addition to our focus on prudently growing our loan portfolio, we have also continued our focus on growing low-cost core deposits while simultaneously reducing our reliance on time deposits and improving our cost of deposits. Core deposits increased to a record $10.6 billion at March 31, 2012, or an increase of 2% or $256 million from December 31, 2011. Within core deposits, we experienced the largest increases in non-interest-bearing demand deposits and savings accounts, which increased 6% or $197 million to $3.7 billion and $73 million or 6% to $1.2 billion respectively. Core deposits now equal 61% of total deposits, and non-interest-bearing demand deposits now equal 21% of total deposits as of March 31, 2012. As we continue to build our commercial banking platform, we will continue our focus on retaining the core deposit accounts related to these new commercial and trade finance loans. Lastly, I would like to talk briefly about the status of our recent capital management actions. As we first announced last quarter, and as a direct result of the strength of our core earnings, balance sheet, and capital levels, the board of directors authorized an increase in our dividend rate to $0.10 per quarter and to repurchase up to $200 million of our common stock. Through the end of the first quarter of 2012, we have bought back 4.6 million shares at an average price of $22.14 per share, or approximately 50% of the amount authorized under our repurchase program. We expect to buy back the balance of the authorized amount during the remaining part of 2012. As our market share grows, our franchise becomes stronger, and our earnings power increases, I'm confident we will continue to demonstrate strong financial performance and provide strong value to our shareholders. With that, I would now like to turn the call over to Irene to discuss our first quarter 2012 financial results in more depth. Thank you, Julia, and good morning to everyone. I would like to discuss the financial results for the first quarter of 2012 in more detail, specifically actions and fluctuations that impacted our net interest margin, non-interest income, and non-interest expense. First quarter earnings totaled $68.1 million, an increase of $1.9 million or 3% from the fourth quarter of 2011, and an increase of $12 million or 21% from the first quarter of 2011. For the first quarter of 2012, we reported an adjusted net interest margin of 421 basis points. This is an improvement of 8 basis points from the fourth quarter 2011 adjusted net interest margin of 413 basis points, and an improvement of 27 basis points from the first quarter 2011 adjusted net interest margin of 394 basis points. Overall, our improvement in the net interest margin from the prior quarter and the prior year was primarily due to a decrease in our cost of funds while we maintained a relatively stable level of interest income. Excluding the net impact of covered loan dispositions, our yield on interest-bearing assets totaled 493 basis points for the first quarter of 2012, unchanged from the fourth quarter of 2011. However, during the first quarter of 2012, total adjusted net interest income decreased $4.5 million from the fourth quarter to $39.3 million due to a decline in total interest-bearing assets of $93.5 million. Our non-covered loan yields remained relatively stable at 473 basis points for the first quarter of 2012 as compared to 476 basis points for the fourth quarter of 2011. While our covered loan yield, net of covered loan dispositions, increased from 826 basis points for the fourth quarter of 2011 to 842 basis points for the first quarter of 2012. Although interest income adjusted for the net impact of covered loan dispositions decreased $4.5 million, interest expense also decreased by $4.7 million or 12% from the prior quarter to $35.1 million for the first quarter of 2012, resulting in a net increase to adjusted net interest income of $173,000. The cost of funds decreased 8 basis points from 83 basis points in the fourth quarter of 2011 to 75 basis points in the first quarter of 2012. The improvement in interest expense and the cost of funds during the first quarter is primarily due to management's proactive reduction of high-cost time deposits and to the strong growth we experienced in demand deposits. For the past two quarters, a significant portion of time deposits matured, and as a result, the company was able to reduce both the balance of time deposits and the average cost of time deposits during the first quarter. Time deposits decreased by $370.7 million or 5% from year-end to $6.8 billion at March 31, 2012. The average cost of time deposits decreased from 1.01% in the fourth quarter of 2011 to 88 basis points in the first quarter of 2012. Looking forward towards the remainder of 2012, we do see additional opportunity to reduce the cost of deposits as additional time deposits come up for maturity. However, the dollar amount of time deposits that will be maturing in the coming quarters is lower than what we experienced in the past two quarters. As such, we do not expect the same level of decrease in our cost of deposits in the future quarters of 2012 as we've experienced in these last two quarters. In addition, the decrease in total interest expense in the first quarter of 2012 also stemmed from the prepayment of $20 million and restructuring of $300 million of Federal Home Loan Bank advances and $200 million of securities sold under long-term repurchase agreement. The effective interest rate on these restructured advances declined from 2.27% to 1.36%. As such, the weighted average effective rate of all FHLB advances at March 31, 2012, declined to 1.65% from 2.31% as of year-end. Also, the company reduced the rate on $200 million of restructured long-term repurchase agreements by 86 basis points during the quarter. These actions served to improve our net interest margin in the current quarter and will also serve to improve it in the future quarters. In terms of our expectation for future quarters, we are comfortable that we'll be able to maintain a relatively stable net interest margin. Although loan yields on the non-covered portfolio are expected to decrease as long as rates remain low, and there is a certain amount of volatility in the accretion income from the covered loan portfolio, we are confident that overall we can maintain a net interest margin to approximate 390 to 4% for the remainder of 2012. Moving on to non-interest income and expense. East West reported total non-interest income for the first quarter of 2012 of $21.7 million, an increase from $937,000 of non-interest income in the fourth quarter of 2011 and $11 million of non-interest income in the first quarter of 2011. The increase in non-interest income from the prior quarter and prior year quarter is primarily attributable to a decrease in the net reduction of the FDIC indemnification asset and FDIC receivable. Branch fees, letter of credit and FX income, loan fees, and other operating income also increased and totaled $21.6 million in the first quarter of 2012 as compared to $17.2 million in the fourth quarter of 2011 and $19 million in the first quarter of 2011. In addition, included in non-interest income for the first quarter were gains on sales of student loans of $4.5 million, gains on sales of SBA loans of $929,000, and gains on sales of investment securities of $483,000. Non-interest expense, excluding amounts to be reimbursed by the FDIC and prepayment penalties on FHLB advances, totaled $101.3 million for the first quarter of 2012. Our efficiency ratio remained stable at 44.1% for the first quarter, compared to 43.8% for the fourth quarter of 2011 and 43.1% for the first quarter of 2011. Excluding amounts to be reimbursed by the FDIC, non-interest expense increased $3.2 million or 3% from the fourth quarter of 2011. The increase in non-interest expense was primarily due to an increase in compensation and employee benefits. Compensation expense increased $5.3 million from the fourth quarter of 2011 to $46.4 million for the first quarter of 2012. This increase was caused by an increase in payroll taxes and due to a reduction in deferred loan costs during the first quarter. As a result of the reduction in loan origination volume in the first quarter of 2012, deferred loan costs decreased, which resulted in an increase in compensation during the quarter. Additionally, legal expense totaled $7.2 million for the first quarter, an increase of $2.8 million from the fourth quarter of 2011. The increase in legal expense was primarily due to covered assets and net of the 80% reimbursable portion from the FDIC of $4.4 million, which is included as part of non-interest income. Legal expense actually declined by $804,000 or 23% quarter-over-quarter. Lastly, during the first quarter of 2012, the company prepaid $20 million of FHLB advances, incurring a prepayment penalty of $1.3 million, which is included in non-interest expense. While we will continue to make additional investments in the future to support our growth, we will also look for opportunities to optimize our operations and increase efficiency. As such, we expect that non-interest expense will continue to remain low and forecast that it will approximate $100 million for the second quarter of 2012, net of amounts that are reimbursable by the FDIC. Finally, as stated in the earnings announcement released yesterday, East West Board of Directors have declared second quarter dividends on the common stock and Series A preferred stock. The common stock cash dividend of $0.10 per share is payable on or about May 24, 2012, to shareholders of record on May 10, 2012. The dividend on the Series A preferred stock of $20 per share is payable on May 1, 2012, to shareholders of record on April 15, 2012. I'll now turn the call back to Dominic. Thank you, Irene. Thank you everyone for joining the call this morning. 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 touchtone 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 Ken Zerbe, Morgan Stanley. Please go ahead, sir. All right. Thanks. I just have two questions. The first one, what would change your views on the timing or the amount of buybacks that you would expect to do this year? The reason I ask is because your guidance is based on a flat balance sheet, and I understand that the risk-weighting goes up given UCB, but it still seems you are being fairly conservative, especially after you did, I guess, half your buybacks in one quarter. Oh, Ken, this is Julia. We are expecting to complete this year, so probably $50 million for the second quarter and another $50 million in the third quarter. Okay. I assume you would go back and re-up it from there? After that, we'll take a look, and in January, what we plan to do is, like a possibility, increasing the dividend and then announce more buyback if it makes sense at that time. Okay. The other question I had, C&I growth looks like it slowed a fair bit this quarter. When you look out over the rest of this year, do you think the growth rate could remain at these lower levels, or is there reason to think it might pick up again? We think that the C&I loan growth of probably about $100 million per quarter is a doable number. Last year we had stronger growth for different reason, the cross-border loan guarantee. So the growth decreased compared to the third quarter, fourth quarter of last year to 90 some million this quarter. But we think $100 million increase, each quarter for the remaining of the year is quite doable. All right, great. Thank you. Our next question is from Dave Rochester, Deutsche Bank. Please go ahead. Hey, how are you guys? Hey, Dave. Can you just update us on where the spreads on C&I and CRE were during the quarter and any change in the competitive landscape in either of those arenas? I just heard some chatter that Wells Fargo was getting aggressive on CRE rates and terms, and I was just wondering if you were continuing to see that. Yeah. We have seen a lot more competitive rates coming from other banks, specifically as you mentioned, Wells Fargo's being one. There are other banks also trying to get more CRE loans and have dramatically reduced the rate. We are seeing that coming. That is the reason why we are expecting our non-covered loans yield to possibly come down a little during the year because obviously, we are looking at some of these CRE loans that may be looking for refinance opportunities from some of the other banks who offer a much lower rate. We are doing fine with growing our C&I loans, and we have plenty of relationship banking type of clients that are not just going out, just shopping for rate differences. All in all, I think that is the reason we expected our loan yield to may come down a little. On the other hand, we have pretty strong cost of deposits, in terms of the cost of deposit rates are doing very well for us to help us to continue to get the margins remain stable. On the resi side, are you still seeing that 5% level on the ARM product that you are producing? I think those were current customers, more like a low doc type loans. Are you still getting those kinds of yields? Yes. The average yield is about 5%. Most of these are 5-year fixed, and then become adjustable. Our niche is to have low doc, but very low loan-to-value. Yep. For a lot of these are relationship customers that come from our retail branch network where they value the fact that we can close the loans timely. We offer mostly purchases as opposed to refinance loans. As a result, timing is very important for them. They want to make sure that they get a loan from a bank that can close the loan timely. You heard that there are a lot of the big banks that they cannot close the loans quickly, so as a result, some of these escrow, they fail to close the escrow on the due date. Yep. How are you thinking about that growth going forward? Should we see this growth persist into the second quarter with the prevailing activity in the marketplace and given what you're seeing in your customer base? We think that it probably will slow down to about $100 million a quarter. Again, we only do purchases, so as a result, we'll see less new funding compared to that. Okay. So maybe a little bit less growth in 2Q versus 1Q, it getting down to 100 at some point as a run rate? Yeah. Yeah. Yeah. We do refi also. The only thing is that we are substantially more competitive in the purchase arena simply because when we can close a loan within 30 days, that's the real key for buyers in the home market. If any buyer say that either they do all cash or they can say that, "I can close this transaction within 30 days," that will make the buyers become a very compelling, attractive buyer to the seller. Since we can always close loans in such an expeditious manner, particularly compared with all the banks out there who takes some time, two, three, four months to close a loan transaction. Therefore, I think that we naturally attract most of the sort of home purchasers. For the refinance people who can take their time to refinance, obviously, our rate would not be as competitive as the large banks out there. So, it naturally just fall out that way. But within the purchase market, because of our requirement for substantially a higher down payment, we naturally attract customers that are willing to put in these 40% plus type of down payment, and then they end up coming to us. Also, Dave, we track the delinquency and the losses from the low LTV loans is very minor. As of now, if you look at our non-accrual loans, it's only $3 million out of $2 billion portfolio, that's less than 20 basis points of delinquencies on our single family loans. Yep. That's attributed to the low LTV. Yep. Okay, great. Thanks for all that, Carla. One last one real quick. On the margin side, I think, Irene, you had mentioned a smaller amount of CDs repricing going forward versus what we've seen over the last couple of quarters. Do you happen to have the dollar amount for 2Q and the rate that's rolling off? Sure. Dave, just as a reminder, last quarter and the quarter before, we had about $2.6 billion at 85, 86 basis points that was maturing in each quarter. This quarter, when we look at second Q, third Q, fourth quarter, it's much lower. Second quarter, we have about $1 billion at about roughly 80 basis points or so. Much lower than in the past. Okay. Each quarter after that, it comes down. Okay, great. Thanks, guys. Our next question is from Aaron Deer, Sandler O'Neill Partners. Please go ahead. Hi. Good morning, everyone. Good morning. I have a quick question or a couple of them, I guess, on the margin. First, with respect to the guidance on the core margin of 390-400, that seems down pretty sharply from the 421 that you had in the first quarter. Notwithstanding some of the asset yield pressures, I am curious what is causing that sharp drop, or if there was some outsized interest income in the first quarter? Sure, Aaron, this is Irene. The guidance that we give out, obviously with the volatility on the accounting for the covered loans, the SOP accounting, there is a certain amount of. We do not know exactly where it would be, quite frankly. Like this quarter, the amount of the net accretable income was about $17 million, which is higher than what we forecast, which is $15 million. So when we talk about the 390-400, I think probably a better way to look at it is that 390 is a little bit of more of a floor of where we think our margin would be, given these various factors of the fact that there is some volatility with SOP income, and then also that we know that the repricing downwards of the CDs, it is not going to be as much in the second quarter in the future as well. The offset to the reduction in the loan yield, there will not be as much. Okay. But the 390-400, that is your core margin expectation, excluding accretion income, correct? Yes. It's excluding the impact of the FDIC indemnification asset, so the core margin. But there is still additional accretable income that comes through from the covered portfolio. Right. Some of that is what I'm talking about, is that it's a little volatile. Okay. At the end of the year, I think you put the net accretable yield remaining at around $161 million. Where does that stand at March 31? As of March 31, it was $142 million. Okay, perfect. Thanks for taking my questions. The next question is from Brett Rabatin, Sterne Agee. Please go ahead. Hi, good morning. Good morning. Wanted to ask from a loan sale perspective, can you guys walk through what products you sold during the quarter, and then just the expectations for sales in the next few quarters and what your plans are there? Sure, Brett. This is Irene. Most of the loans that we sold during the first quarter were our government-guaranteed student loans. That was a large reason for the gain. We also did sell some SBA loans, the 7(a) program as well. That was about $1 billion of the gain as well. We are originating SBA loans on a regular basis, and it's very attractive to sell those in the market. So, 8, 9 points or so. So those we'll continue to originate and sell. The student loans is something where we are purchasing the market, and once we're kind of accumulating a certain size, we're selling those as well. So in the future, probably we will continue to have both of these sales of the SBA loans and the student loans. Over time, the student loan sales would diminish, though. Okay. Secondly, just wanted to ask from a runoff of the covered portfolio perspective, as that continues to occur, and you're obviously in a position of solid profitability, but you've got to replace that coverage asset. Can you talk about the strategy longer term and what you want to do with the franchise, maybe Dominic, as it relates to growing it, as opposed to you're going to obviously having high profitability and be buying back stock in the near term? You've been reticent to want to do acquisitions, but I'm just curious on your longer term view on planning and strategy. Well, I think specifically related to the cover loans. Yes, the cover loans will continue to pare down gradually. In the meantime, we are converting some of these cover loans to non-cover. Obviously, many of the cover loans are good United Commercial Bank clients, and we have every reason to keep and retain. So what you will see is that gradually, in time, either we have problem loans in that cover portfolio that we resolve through the normal process of foreclosure or worked out and so forth, or we would have these clients gradually converting to the non-cover portfolio. So you will see the cover loans continue to pare down. But then, as you have seen for the last 2 years, we have continued to have very nice profitable growth in our non-cover loan portfolio. As non-cover loans continue to increase in size, it would offset against the decrease in size of cover loans. So all in all, my sense right now is that we most likely will stay relatively stable and will be a very small percentage growth in terms of overall balance sheet, and our profitability will continue to maintain high. If we have some incredible great opportunity coming to us from an acquisition point of view, we never hesitate to make a move on that. We have plenty of capital, and we have all the human resources available to do an acquisition deal. But on the other hand, we do not need to use acquisition to grow our earning per share. Therefore, we're going to manage our capital very efficiently. That is that we will look at where we are today. If there is not some very strong, incredible candidate that's standing in our sideline waiting for us to have, then we will continue our capital management, which is increase our dividends, buying back shares, going forward in the next year or 2, and continue to transform the balance sheet by putting on more C&I loans, having more low-cost commercial deposits, and less reliance on real estate. And we have made some really good progress for the last 2 years in terms of dramatically increasing the C&I loans in a prudent and a conservative way, and also substantially increasing our DDA, demand deposit. As we mentioned earlier, we have now a record amount of $3.7 billion of demand deposits. One day at a time, one month at a time, and one quarter at a time, we are making those shifts to keep our balance sheet stronger and stronger and also make ourselves substantially more relevant to be that financial bridge between the East and West, and doing business between U.S. and China and helping our U.S. clients to expand their business in the Asia region and vice versa. And that is our niche, and that's what we do best, and I think that there will be plenty of great opportunities for us to come. Okay, great. Thanks for the color. The next question is from Herman Chan, Wells Fargo Securities. Please go ahead. Thanks. I wanted to follow up on the $100 million expected quarterly commercial growth. Do you see future loan growth driven more by trade finance or more traditional C&I? Also, can you give an update on the build-out of the commercial platform and some of the lending niches such as entertainment, technology, et cetera, that you've highlighted in the past? Thanks. In terms of C&I and trade finance, I would say that it's pretty much just growing proportionally. We all continue to have good momentum from both sides. The reason is because, as you said earlier, we continue to build out industry expertise in various industries that is relevant to the U.S.-China investment and trade arena. Clearly, from technology to entertainment, healthcare to import-export related to agriculture, seafood, et cetera, those are all relevant industries that we are building our expertise. So within that arena, I think that some of these clients that we bring in are going to have the import and export elements. While there are others, besides taking care of the import-export business, many of them still have their working capital line needs, then they need to get term loans from us in terms of for certain type of activities that are going on in the commerce side. In that regard, I think that we will expect continuing growth in both regular C&I and also trade finance with the emphasis on industry that are relevant to that U.S. and Asia region. Great. As a follow-up on the residential mortgage side of things, there has been some concern from other players on the potential involvement with the CFPB regarding these lower doc originations. Can you give us an update on the regulatory front regarding these ones? Well, at this time, nothing has been finalized. We will monitor. What we do is that we will only do things that are allowed. But at this time, that is what we do. Okay. Thanks for taking my questions. The next question is from Jonathan Elmi, Macquarie. Please go ahead. Hey, good morning, guys. Thanks for taking my questions. Just two quick follow-ups on the guidance. First, on the full year 2012 guidance. Just wanted to confirm, does that include any portion of the share buybacks that remain? No, it does not. It does factor in the shares that we already bought back in the first quarter, Jonathan, but not any remaining. Got it. Then the second question was just on the FHLB prepays and the repo restructurings. When exactly did those occur during the quarter? They both occurred probably at the midpoint of the quarter. Okay. Just trying to get a sense for to what extent there's going to be some follow-through benefit to the margin from those actions. It sounds like there should be a little bit then. There should be a little bit. Point to point, when we look at year-end to the first quarter and the benefit is probably about 23, 24 basis points. Okay. Okay, great. That's all I've got. Thanks, guys. The next question is from Joe Gladue, B. Riley. Please go ahead. Yeah. Hi. Good morning. I would like to ask, I guess, a couple of numbers questions on asset quality first. Could you give us the number on performing TDRs at quarter end? Yes. At quarter end, performing TDRs were about $30 million. Okay. Just in general, what were the trends in classified loans and inflows to non-accruals? Overall, I think you can see the results from the reduction that we had in the non-accrual loans, but the trends were positive overall. Classified assets did come down a little bit. Movement into non-performing loans also came down. During the first quarter, the movement into NPL was about $30 million as well, and as you recall, that's down from probably about $50 million or so in the fourth quarter. Okay. Lastly, I guess I'll ask a little bit about your China business. Of course, there's continually changes in regulations in the economic environment in China. Just wondering if you could touch on anything significantly positive or negative for your business there and what the overall outlook is. Well, first of all, we have from the overall Greater China region, I'm combining Hong Kong and China together. Our total loan portfolio is actually less than half a billion. So it's a very small percentage to the overall balance sheet. Now, keep in mind, though, our strategy to be that bridge between East and West is not to make our Greater China portfolio to equal in size in the United States, is that to build the expertise of knowing how to do business between U.S. and China so that we can become a substantially, much more attractive financial institution to our U.S. customer base who do have either a presence in China or looking into expanding over there, or the fact is most companies in the United States right now are importing goods from China. Our expertise becomes extremely valuable for all of these U.S. clients who needs to deal with the Greater China region. That's the purpose, not to go in there in China and trying to find enough assets to book to equal to what we have in the United States. That being said, that's why any of these political or economic volatility over there do not have as big of an impact to us. Secondly, we are still in a build-out mode. When I say build-out mode is that it took us, starting day one when we took over United Commercial Bank back in November of 2009, we took over a loan portfolio from United Commercial Bank in China with over 30% non-performing loans. We, as of today, have just completed the cleanup and have now get the non-performing loans from 30% plus down to zero. Which is, I think, to the regulators in China, a great accomplishment. We're now in the process of building the infrastructure capability in terms of system upgrade. A lot of the back office system upgrade in terms of computer, online banking, and so forth. We're in the process of doing that. We're also in the process of recruiting new talent, commercial banking talent coming to the bank. We're still in that growth mode. You would not be seeing a lot of activities until we have complete the build-out of the infrastructure and also the adding the human resources. Then I think that we will have a lot more coming. Now, the other thing I want to highlight also, people heard a lot of news about China, that the economic condition is slowing down, and people are getting concerned about how this slow economy in China would affect the global economy, et cetera. I think those are all legitimate concern. However, keep in mind that China went from over 9% GDP growth, and in fact, years ago, over double digit GDP growth per year, now down to 8.1% or maybe even potentially someday be less than 8% or even dramatically come down to 7.5% or something like that for GDP growth. But we got to keep that in mind, is that even for that kind of growth, is substantially higher than most of the countries around the world. So for small little East West Bank in China, we'll find our business. It's much easier for us to double our size or triple our size at any time, any day, in a vast economy like that. With a GDP which dramatically dropped down to still over 8%. I think that's still an extremely attractive environment for us to do business. More importantly, once again, I highlight the fact that we are not looking into the consumer market in China. We're looking at just helping U.S. clients to do business in and between U.S. and China. I think we're going to be looking pretty good going forward in the next few years in terms of our U.S.-China strategy. Okay. Thank you. That's all I had. Our next question is from Joe Morford, RBC Capital Markets. Please go ahead. Hi. Good morning, everyone. Good morning. Really, first question is just to follow up on that last one. I was, I guess, curious what amount of loan growth you are targeting for the China region this year, especially now that you no longer have to fight the pay downs of NPAs. Also, can you quantify what kind of spending you intend to make on these infrastructure investments and hires over the next year? In terms of the loan growth in China, I think the difference is that last year we had the opportunity of the cross-border loan guarantee program put out by the Chinese government that allow us to actually have a very nice loan growth, both in particular for our Hong Kong branch, working with our branch in China. The quota was up, as I mentioned, last year, that we used it up very quickly. We are waiting to find out this year what the new regulation is and then how much allocation we get. If we get a nice increase, then I expect that we will do quite well in terms of that loan growth for Hong Kong and China. If we don't, then I don't see there's much growth opportunity for us there. It's a combination. Now, we do have a much better position without these non-performing asset to deal with over there. I think that will put us in a much better position in terms of having the flexibility to grow our loans. However, the constraint will come back to what kind of quota is available from the regulators over there that will allow us to expand. Because we are not as interested in doing too many unsecured type of credits. These cross-border guarantee loan, the nice thing about it is 100% secured by either deposits or standby letter of credit from these customers. Therefore, either way, those are very secure deals, and then those are kind of things that we like to do more. Now, in terms of infrastructure and expenses and so forth, again, because our operation in Hong Kong and China is relatively small, the expenses would not be in any way material that would affect our overall G&A expenses for the next nine months or so. Plus most of these are capitalized and amortized over time. When you talk about the infrastructure expenses capitalized. The human resources, the personnel, obviously that's part of the G&A expenses. It will increase our payroll, as we talked about, just like any of the C&I lenders that we hire in U.S., in California or New York and so forth. It will increase our payroll. On the other hand, we bring these people in to generate revenues, to generate business. So we expect that between the net interest income and the fee incomes will be more than offset against the payroll expenses that will come to us. Okay. That's helpful. One other question was, just wondering if you could talk about the decrease in risk-weighted assets this quarter, which was just under $600 million or about 4% in the quarter, and just what were the real drivers to that? Sure, Joe. If you look at our balance sheet, we did have more cash at March 31st versus year end. There are a lot of assets that moved, really, because we sold the securities that from 100% risk-weighted to zero, and that's probably the primary reason for that. Okay, thanks so much. Our next question is from Jennifer Demba, SunTrust Robinson Humphrey. Please go ahead. Thanks. I have two questions. Irene, I was just wondering if you could quantify the impact to compensation cost from the lower deferred loan fees. Also, Dominic, if you could just talk to what you're seeing in terms of a pipeline for acquisitions or discussions, if you're seeing any changes there. Jennifer, on the first part of your question, I think it was about the impact to compensation expense for the lower deferred comp. It's about deferred fees, excuse me. It's about $4 million for the quarter. In terms of pipeline for acquisition, we currently do not have a pipeline. Okay. You're not seeing any increase in discussions despite the fact that we've seen probably over the last month or 2, just more activity in the industry in general. I think that there's always activities, there's always discussion, and I'm seeing that quite on a daily basis. The only difference is that from our perspective is that everything is relative. What we looked at, what we're doing right now is that nice organic growth, very controllable type of execution in terms of specifically targeting the type of industry where we'll grow our loans, and finding the right type of account officers that can help us to get more demand deposits and lower cost of funds, and in a much more controllable expense and risk management point of view. It just makes it hard for us to find attractive investment targets. I think a good example will be, as just recently, many of you have seen Pacific Capital sold to Union Bank for a pretty large premium. And those are kind of things that East West Bank would never get into this type of activity in terms of paying that kind of premium, and ultimately have to just work ourselves to a very sort of like challenging situation to make up for that goodwill. To us, it's just not a strategy that we would like to pursue. Thank you. As a reminder, if you have a question, please press star then one. Our next question is from Gary Tenner, D.A. Davidson. Please go ahead. Thanks. Good morning. Irene, I was just still curious about your guidance on the margin, and I wonder maybe just one way of looking at it. Could you kind of talk to the first quarter margin a little bit? Obviously, that was above your expectations. Maybe talk to the factors that kind of really drove that 20 or 30 basis points above where your guidance was in the first quarter. Sure, Gary. I think first and foremost, when we look at the margin for the first quarter, overall compared to our forecast and our expectation, we were able to reduce the cost of deposits substantially more. Obviously, we know how much is going to mature every quarter on the CDs, which is the largest variable there. But exactly what tenor it goes into, there is some uncertainty also what the market competition will be. So that was the largest driver, more positive than we had expected, which is obviously great for us. Additionally, some of the actions we took to restructure the borrowings was not something that we had factored in from day one of our guidance. Last, I would say on the asset side, overall, compared to maybe our little conservative forecasting, our interest income on the loans, covered and uncovered, held up a little bit better than we had forecast. We had a little bit more accretable income. We normally forecast that the net accretable income is about $15 million. In every quarter, it seems like $15 million is something that's achievable. This quarter is a little bit higher as well at $17 million. So all of those factors helped keep that margin high. Additionally, I would also say that overall, the interest earning assets did come down, inch down a little bit. So overall, our strategy has been more retaining the higher yielding, more profitable businesses, kind of reducing some of the lower yielding assets. Okay, that kind of goes to my follow-up question. In terms of the non-covered loan yields, I think the yields were only down 3 basis points in the quarter from fourth to first. Are you anticipating, is there a large slug of loans that are scheduled to reprice coming up here in the second or third quarter? Or how do we kind of think of how you're managing the yields on the non-covered portfolio? No, we don't have any anticipation of any loans coming due that will have a substantial repricing. But what we do have is that we do have a very conservative view about competition. Now, this is, I think, a speculation. Hopefully, we are wrong, and then our margin will be very strong. But the reality is that we just think that a lot of banks out there who do not have a very strong niche or a very strong strategic direction, they're going to need to use pricing to grow their balance sheet to get things going. There are going to be banks out there. Every quarter go by, there will be another one or two banks who are out of MOU or C&D and then ready to be in business. We just expect that when it comes to that point, and many of these banks, particularly community banks, their primary focus will be going back to get CRE loans, because that's what they're good at and that's what they do. When they all start coming back in time to get CRE loans, and the primary business that they know how to do is CRE, I would expect that there's going to be a lot of competition that will drive the pricing down dramatically. Now, that's what our speculation is that in time. We expect that by now there will be a dramatic competition that is happening. It hasn't happened yet, and in fact, that's why in the first quarter, other than the Wells Fargo and a few others, it hasn't quite happened yet. But it's just natural to expect that it will happen in time. Would it be the second or third quarter, or will it be the fourth quarter? But in time they will come. With that in mind, I think that we just think that it's only prudent that we expect that loan yield will come down, because at some point in time, even extremely loyal and great East West Bank customer is going to ask us, say, "Well, East West Bank, get real. This is what the market is and this is what your rate is. When are you going to come down?" Then we will need to get our rate down to match some of these competition. All right, great. Thanks for taking the question. Okay. Our next question is a follow-up from Joe Gladue, B. Riley, please go ahead. Yeah, just wanted to touch on the, I guess, provision and reserve build. In the first quarter, your provision was considerably larger than the charge-offs. I understand you're, I guess, keeping the allowance at a pretty steady percentage of total loans. But at the same time, with non-performing assets coming down, I guess the reserve is approaching 2 times non-performing loans. Just wondering how that's impacting your thoughts on provisioning going forward. Sure, Gary. As you mentioned, you're exactly right. The total allowance, the total non-covered loan ratio, we maintain that at 2.04% as of the end of the first quarter and also the end of last year. What we're looking at is the overall kind of reasonableness in the allowance. The actual provision and charge-off. Charge-offs are really a cash kind of basis. Lots of times there are loans where we reserve for it in the past, and the charge-off is when we take the charge-off that you see in the quarter. So overall, we look at the reasonableness of the overall allowance. Also, I'd say maybe compared to many of our peers, we do have more loan growth in the C&I side and the single-family side as well. So we're continuing to reserve for that. In the quarter, you will see in our allowance table in the press release, we footnote and disclose that we did increase the allowance on the loans that are covered, but there are additional drawdowns on that. The specifics of the accounting of that, I would be happy to talk to you maybe offline. Okay. All right. 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. I just want to say thank you again for all of you who joined our call this morning, and we all look forward to talking to you again in July. Bye-bye. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.