Earnings Call: Q4 2011

Jan 20, 2012

Good morning, everyone, and welcome to East West Bancorp fourth quarter 2011 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, you may 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 and then one on your touch-tone telephones. To withdraw your question, you may press star and then two. Please also note that today's event is being recorded. At this time, I would like to turn the conference call 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 fourth quarter of 2011. Here to review the results are Dominic Ng, Chairman and Chief Executive Officer. Julia Gouw, President and Chief Operating Officer, and Irene H. 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 included in our annual report on Form 10-K for the year ended December 31, 2010. 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 to our earnings call. Yesterday afternoon, we were pleased to report financial results for the fourth quarter and full year of 2011. East West reported strong earnings of $66 million or $0.43 per diluted share for the fourth quarter of 2011. As compared to the prior quarter, East West grew earnings by 6% or $4 million and increased earning per share by 5% or $0.02. For the full year, East West reported record earnings of $245 million or $1.60 per diluted share. As compared to the full year of 2010, East West increased net income by $81 million or 49%, and also increased earnings per diluted share 93% or $0.77. East West achieved many financial successes in 2011. We finished the year with record assets of $22 billion and the highest annual net income in the history of our bank. For the full year of 2011, total adjusted net interest income increased to a record $779 million. Despite the low interest rate environment, our net interest margin for the full year remained stable at 4.02%, driven by strong growth in both loans and low-cost core deposits. Total loans grew 5% or $752 million year to date to a record $14.5 billion. Core deposits increased an impressive 16% or $1.4 billion to a record $10.3 billion. The growth in low-cost core deposit resulted in a 14-basis point reduction in the cost of deposits to 64 basis points for the full year. Additionally, credit-related costs and non-interest expense decreased substantially in 2011. Credit quality improved with the provision for loan losses down 53% or $105 million, and net charge-offs down 45% or $91 million from a year ago. At East West, we have always held a tradition of achieving strong operational efficiency by carefully evaluating expenditures and prudently making critical investments. In 2011, we were able to reduce operating expenses by 6% or $25 million from 2010 after adjustments for FDIC prepayment penalties and amounts to be reimbursed from the FDIC under the loss share agreement. These cost reductions, supported by our strong loans and deposit growth, resulted in an increase in net income for each consecutive quarter in 2011 to a record of $245 million for the full year. I am pleased to report that across the board, all our key financial metrics and ratios remain strong or improved throughout the past year. Our return on average assets and our return on average common equity improved to 1.14% and 11.08%, respectively, for 2011. During 2011, we provided shareholders with a higher return by increasing the dividend. As announced in our earnings release yesterday, the board has approved a further 100% increase in the annual dividend rate to $0.40 per share, effective in the first quarter of 2012. Additionally, the board has authorized a new stock repurchase program, and we expect to repurchase up to $200 million of common stock. These actions can be achieved due to the strength of our capital levels, balance sheet, and profitability. As we grow and expand core earnings in 2012 and beyond, we will maintain this commitment to return value to our shareholders. Again, 2011 was a record-breaking year for East West. I am very pleased with our accomplishments and look forward to new opportunities and success in 2012. We are confident that we can grow our business, increase market share, and win new customers while we keep an eye on the bottom line and ensure strong core profitability. I believe that we are on track for another year of solid financial performance in 2012. With that, I will now turn the call over to Julia to speak in more detail about our accomplishments, 2011. Thank you very much, Dominic, and good morning to everyone. I would first like to spend a few minutes discussing some of the main drivers behind our balance sheet growth. Total loans increased to a record $14.5 billion at December 31, 2011, an increase of 2% or $291 million from the third quarter of 2011 and an increase of 5% or $752 million for the full year. Our non-covered loan portfolio increased 5% or $508 million from September 30, 2011, and an increase of 18% or $1.6 billion year to date. The loan growth in our non-covered portfolio, both quarter to date and year to date, was driven by strong growth in commercial and trade finance loans and single-family mortgage loans. Combined, total non-covered and covered commercial and trade finance loans increased $89 million or 2% from September 30, 2011 to $3.9 billion at December 31, 2011, and now total 27% of our total gross loan portfolio. Our long-term goal is to have commercial loan portfolio equal at least a third of the total loans. The 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 portfolio, we also continue to experience strong growth in our non-covered single-family loan portfolio, which grew $279 million as compared to the third quarter of 2011 and $678 million as compared to the fourth quarter of 2010. These single-family loan originations have largely stemmed from our retail branch network. Approximately half of the mortgages originated in the fourth quarter were from our historically strong market of Southern California, while the remaining loans were originated out of Northern California and our out-of-state locations. Customer demand remains high for single-family loans in our core markets. Our underwriting criteria for single-family loans remain strong, with very high down payments and low loan-to-value ratio requirements. The maximum loan to value that we will lend against is 65%, and on average, the loan to value of the loans we originated in the fourth quarter was only 56%. The last thing that I would like to comment on regarding our loan portfolio is our continued reduction in non-covered land and construction loans, which decreased $28 million or 7% to $345 million or 2% of our total loan balances. Since the start of the credit crisis, East West has aggressively worked through this portfolio and reduced exposure levels. As a result, we expect credit costs to significantly decline in 2012. On the deposit front, we made strong progress in 2011 in building lower-cost core deposits. Core deposits increased to a record $10.3 billion at December 31, 2011, or an increase of 5% or $483 million from September 30, 2011. Quarter to date, all core deposit categories grew, with the largest increases in money market deposits, which increased 5% or $244 million to $4.7 billion, and demand deposits, which increased 3% or $115 million to a record $3.5 billion. Non-interest-bearing demand deposits have grown substantially in 2011, increasing 31% or $816 million from a year ago. DDA deposits now comprise 20% of total deposits, up from 17% a year ago. As we continue to build our commercial banking platform, we are placing renewed emphasis on core deposit generation and winning the operating accounts related to the new commercial and trade finance loans. Maintaining strong growth, profitability, and shareholder value have been key to our success over the years. We realize that in order to achieve these goals, we need to have an active, ongoing evaluation of our operating platform. With the acquisitions we have completed in the past, we acquired branches in overlapping locations. in 4Q 2011, we consolidated four branches into existing branches, resulting in a reduction of four branches in our network. Three of these branches were located in the Greater L.A. area, while one was located in Northern California. Because most of these branches are in close proximity to the receiving branches after consolidation, we can still serve our customer base well while streamlining our operations and obviously reducing overhead. In the first quarter of 2012, we have announced the further consolidation of several branches, resulting in a reduction of eight additional branches in our network. We will continue to look for other opportunities to optimize our branch networks, including opportunities to enter new markets and open new branches in regions where we have less of a presence. Ten years ago, at the end of 2011, East West had $2.8 billion in assets, $2.2 billion in loans, and $2.4 billion in deposits, and we earned $39 million in net income for the full year. Ten years later, in 2011, total assets, loans, and deposits have grown seven times, and net income has grown six times. As we begin the new year, we are proud of the progress we made this past year and expect to continue to achieve strong results in 2012. We look forward to another 10 years of great growth and profitability. As in the past, in our earnings release, we provided guidance for the first quarter of 2012 and the full year of 2012. I would first like to point out that this earnings guidance does not incorporate the impact of our planned buyback of $200 million of our common stock. We currently estimate that fully diluted earnings per share for the full year of 2012 will range from $1.72-$1.76, an increase of approximately 7%-10% from 2011. This EPS guidance is based on overall asset growth of 2%, a provision for loan losses of approximately $60 million, and adjusted net interest margin of approximately 3.85%. Also, for the first quarter of 2012, we currently estimate that fully diluted earnings per share will range from $0.41-$0.43 per dilutive share. This EPS guidance 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%. Provision for loan losses of approximately $15 million-$20 million for the first quarter. Total non-interest expense of approximately $100 million for the quarter, net of amounts to be reimbursed by the FDIC. An effective tax rate of approximately 36.5%. Finally, as stated in the earnings announcements released yesterday, East West's board of directors has declared first quarter dividends on the common stock and Series A preferred stock. The common stock cash dividends of $0.10 is payable on or about February 24, 2012, to shareholders of record on February 10, 2012. The dividend on the Series A preferred stock of $20 per share is payable on February 1, 2012, to shareholders of record on January 15, 2012. With that, I would now like to turn the call over to Irene to discuss our fourth quarter 2011 financial results in more depth. Thank you very much, Julia, and good morning to everyone. I am going to discuss our financial results for the fourth quarter and full year 2011 in more detail, specifically as it relates to our net interest margin, credit quality, and non-interest expense. Fourth quarter earnings totaled $66.2 million, an increase of $3.8 million or 6% from the third quarter of 2011, and an increase of $9.9 million or 17% from the fourth quarter of 2010. For the full year 2011, net income totaled $245.2 million, an increase of $80.7 million or 49% from 2010. Our earnings growth in 2011 primarily stems from a reduction in credit costs and other operating expenses, while we also grew the balance sheet and loans and maintained a stable net interest margin. For the fourth quarter of 2011, we reported an adjusted net interest margin of 4.13%. This is an improvement of 15 basis points from the third quarter, adjusted net interest margin of 3.98, and represents an increase from our previously disclosed earnings guidance in the third quarter earnings release. Although the yield on the loans and investment securities decreased in the fourth quarter 2011, as expected, overall, the net interest margin improved due to reduced deposit costs, better than expected loan growth, and a slight decrease in lower yielding assets. As we mentioned last quarter, a substantial balance of time deposits matured during the fourth quarter, giving us the opportunity to reduce both rates and balances on these maturing deposits. As a result, time deposits decreased to $7.1 billion at December 31, 2011, or a decrease of 5% or $338.4 million from September 30, and the average rate on time deposits decreased 11 basis points to 1.01% for the fourth quarter. In our earnings guidance for the fourth quarter, we had assumed a more conservative rate of decline in the cost of deposits, and our actual results exceeded our estimates. Also, we selectively reduced the cost of other deposits as well and reduced the cost of all deposit categories by at least eight basis points quarter-over-quarter. These actions, combined with the benefit of the growing non-interest-bearing demand deposits, positively impacted the net interest margin by about nine basis points. The last item that had a substantial impact on our fourth quarter net interest margin is a change in the composition of our interest-earning assets between the third and fourth quarters. Quarter-over-quarter, the mix of our interest-earning assets improved. Primarily, this improvement came from the increase of average loans receivable, while due from banks and other short-term investments that have lower yields decreased. In the fourth quarter, total loans receivable increased at a level higher than we expected due to higher than expected growth in single-family mortgages, and because we did not sell any student loans in the quarter. In total, average earning assets decreased $194.1 million quarter-over-quarter. In terms of our expectations for 2012, we are comfortable that we will be able to maintain a relatively stable net interest margin in this ongoing low interest rate environment. While we have assumed some decline in our net interest margin, overall, given our expected loan growth, core deposit growth, continued ability to reduce our cost of deposits, and accretable income from the covered loans, we expect our margin to approximate 3.85% for the full year of 2012. Compared to peer banks, East West has levers that can be utilized to maintain a strong net interest margin, including the accretable yield from the FDIC-assisted transactions and the ability to further reduce deposit costs. As of December 31, 2011, we had $161 million in net accretable yield that will be accreted into interest income over the life of the loans. We expect that these amounts will largely be accreted into interest income over the next three years as these loans pay down and mature. Additionally, in the first quarter of 2012, we have approximately $2.5 billion in time deposits with an average rate of 80 basis points maturing. We anticipate that these maturing time deposits will be replaced at lower rates. As the deposit mix changes, as we continue to focus on low-cost commercial deposit customers, the cost deposits is also expected to improve. Also, as opportunities arise to reduce borrowing costs in the future, we will continue to take them. Year-over-year, we have reduced FHLB borrowings $758.9 million or 63%. In addition, in the second and third quarters of 2011, we called $21 million of high-rate junior subordinated debt, and in the fourth quarter, we purchased $2 million of junior subordinated debt at a gain of $400,000. Moving on to credit quality. Asset quality metrics improved throughout 2011 and into the fourth quarter. For the ninth consecutive quarter, net charge-offs declined, and non-performing assets, excluding covered assets, remained under 1%. The provision for loan losses was $20 million for the fourth quarter, a decrease of $2 million or 9% from the third quarter. Net charge-offs decreased $2.5 million or 10% for the fourth quarter, and year-over-year, charge-offs decreased 45%. All of these data points indicate that credit quality continues to improve and that credit costs should be less of an issue with each passing year. We currently estimate that provision for loan losses will approximate $60 million for 2012. The company reported total non-interest income for the fourth quarter of 2011 of $937,000, compared to total non-interest loss of $13.5 million in the third quarter of 2011, and non-interest loss of $17.3 million in the fourth quarter of 2010. Branch fees, loan fees, and letters of credit and foreign exchange income totaled $15.8 million in the fourth quarter, as compared to $17.1 million in the third quarter of 2011 and $13.7 million in the prior year quarter. Quarter-over-quarter, branch fees declined $800,000. Of this decline, approximately 50% was due to a decrease in Visa debit card fees resulting from the cap on interchange fees as required by the Durbin Amendment. Also included in non-interest income for the fourth quarter of 2011 were gains on sales of SBA loans of $1.4 million and gains on sales of investment securities of $2.9 million. Although we continue to make selective investments to support future growth opportunities, we also remain very disciplined with expenses, resulting in an efficiency ratio of 44% for the fourth quarter of 2011. Netting out amounts that are reimbursable by the FDIC, fourth quarter non-interest expense totaled $98.1 million, an increase of $934,000 from the third quarter, and an improvement of $2.7 million from the prior year quarter. As compared to the third quarter, compensation employee benefits and occupancy and equipment expense increased 3%, or $1.2 million, and 1%, or $149,000, respectively. Also, deposit insurance premium expense increased in the fourth quarter 2011 as compared to the prior quarter, due to a third quarter adjustment resulting from a lower actual assessment in that period. Credit cycle costs including REO expense, loan-related expense, and legal expense totaled $21.9 million for the fourth quarter 2011 as compared to $15.7 million for the third quarter 2011. As we have discussed in the past, under loss share agreements with the FDIC, 80% of eligible expenses on covered assets are reimbursable from the FDIC. Of total credit cycle costs incurred in the fourth quarter, $10.7 million related to covered loans and real estate owned, for which we expect that 80%, or $8.6 million is reimbursable from the FDIC. Lastly, in the fourth quarter, amortization of investments in affordable housing partnerships decreased $2.4 million to $2.9 million, and consulting expense decreased $1 million to $1.1 million as compared to the prior quarter. While we may make additional investments in the future to support our growth, we will continue to 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 will be approximate $100 million for the first quarter of 2012, net of amounts that are reimbursable by the FDIC. I will now turn the call back to Dominic. Thank you, Irene. I will now open the call to questions. At this time, we will begin the question and answer session. To ask a question, you may press star and then one using a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up your handset before pressing the keys to ensure good sound quality. To withdraw your question, you may press star and then two. Once again, in order to ask a question, please press star and one. Our first question comes from Lana Chan from BMO Capital Markets. Please go ahead with your question. Hi. Good morning. First question is related to the stock repurchase program. It is, I guess, based on your expectations for internal capital generation and expectations for fairly low overall balance sheet growth in 2012. Would you expect to be able to complete that $200 million stock repurchase program in 2012? Lana, yes. We do expect to be able to complete that this year. Okay, great, Julia. Then a second question on fee income side. That seemed a little bit light this quarter due to a couple of factors that you talked about before. What are the sort of expectations for 2012 there? Are there areas of growth that we should assume that is going to drive that line item higher? Hey, Lana, it's Irene. Yes. As we talked about earlier in the call today, there are some areas where with the Durbin Amendment, there will be some reduction on an ongoing basis. However, because we are having growth in other fee generation areas related to our C&I growth and our commercial initiatives, we feel when we look at 2012, the total run rate will be at the similar level it was in 2011. Okay. In terms of your run rate, that excludes the FDIC impact. Is the run rate- Correct. Okay. Does that include further asset sale and securities gains? No, that would be excluded. With the fee income, excluding the gain on sale, we expect the run rate for 2011, about $80 million, probably will continue in 2012, and hopefully we can increase it slightly, but that should be a pretty good run rate. Okay. On top of that, when we have opportunity, we'll have some gain on sale on assets. Okay. That's helpful. Thank you. Yeah. Our next question comes from David Rochester from Deutsche Bank. Please go ahead with your question. Hey, thanks for taking my questions. Just on the capital side, going back to that, if you're this focused on share repurchases, does this sort of shift the M&A avenue as a method for deploying capital even more to the back burner at this point? Well, from an M&A point of view, I think we looked at, in today's current landscape, the FDIC deals, there are really not many. Actually, even in 2011, we repeated that discussion as that we just didn't find too many of those deals that are attractive in comparison to our organic growth. Because obviously, deals still out there, and I think many of them, we can still make it accretable. But on the other hand, in comparing to us doing organic growth, some of them just don't measure up. If you look at today's environment, banks are selling at a discount, mainly banks with substantial amount of either residential or commercial real estate portfolio. This is something that we don't need more, and it will be a distraction to us. So the price has to be extremely attractive. Also, we need to make sure that the type of asset of the business they have are not that much of a distraction from us running our core business, which is really being the financial bridge between the East and the West and doing a lot more of the international trade and helping investment from China to invest in U.S. and to create jobs and so forth. So those are the type of activities we are really focusing on. For those banks that have assets that potentially that can be a major distraction, when we add up the opportunity costs or these intangibles, oftentimes we conclude that it's not worth our attention. That's why at this moment, we conclude that the likelihood of us being very active in the M&A side is relatively remote. Now, if there is something that's really attractive that comes out that fits the criteria that we need, we can do it in the next day. The only thing is that we're just being realistic. Yep. No, I appreciate that color. I guess longer term, once the FDIC loss share is gone or even before that when the majority of the cover portfolios run into your held for investment portfolio, and then you've levered through share repurchases and growth, where do you see the capital ratios shaking out in terms of Tier 1 common and TCE? Where is your comfort level? Well, we always want to have strong capital levels, and we will continue to review. If you look at our history, our capital level has always been strong, and we pretty much use common equity, tangible common for our capital base. That is something that we will continue to review, but we will make sure that we have very strong capital level. Are we talking about like a Tier 1 common ratio target longer term of 8% or 8.5%, something like that? It would seem like that would provide a large amount of cushion, giving you flexibility to continue share repurchases through 2013 and beyond. Just curious what your thoughts are there. Yeah, that is about in the range, but we will always continue to look at what is the capital level of the peer banks and what kind of cushions we would like to have. But that is not outside the range that we would look at. Okay, great. Just one last one, switching to the loan growth in single family. Appreciated the credit metrics there on that production. I was just wondering if you could talk about the pricing on that as well, and what the product mix looked like as well as the mix of structure. Yeah, most of these are our retail core customers that are buying or refinancing their homes. Most of them are purchasers. We do not portfolio the 15 or 30-year fixed. Most of them are three, five, seven-year fixed, and the yield is close to 5%, around 5%. Okay, and I guess just a quick follow-up on that. There's some banks talking about a very large bank that's very active in resi lending in California right now that's offering rates around the 3% level for ARM product, and I'm just curious as to how your product offering goes head-to-head against them, and clearly you guys are taking share there. Just trying to figure out what the dynamic is there and how you're so successful. Yeah. Well, this come from our core customers that we know through our retail branch network. They come to us because they know us, and we provide better service in term of knowing who they are and not asking a lot of information. There are always a lot of people that are willing to go through the hassles of providing a lot of information to get the low rate. There's enough for everybody, and our customers obviously prefer to bank with us because they know us. Okay, great. Thanks, guys. Okay, thank you. Our next question comes from Chris Stulpin from Raymond James. Please go with your question. Thank you. Following up on the one to four family loan category, do you have a percentage of total loans that you feel it could top out at because you've been growing that 18% for the past two linked quarters? We think that the volume most likely will go down in 2012 as it was mentioned that there are more competitions into the market. We don't expect the same rate of growth as what we had in the last couple quarters. But we will continue to be able to service some of the customers that are looking to get mortgage loans. But we don't expect the volume to be like it was before. Okay, great. My follow-up question has to do with loan growth as well. I guess your C&I loan growth tapered off compared to the last few quarters. How should we think about C&I growth going forward? I'm sorry, can you repeat the question again? Sure. I'm sorry. Looks like the C&I loan growth tapered off compared to the last few quarters. How should we think about C&I loan growth going forward? Excuse me. I think the C&I loan growth in 2012 should be lower than 2011. In 2011, we had the opportunity to make some significant inroad in terms of booking some loans in Hong Kong and also China that due to the circumstances that the Chinese government encourage the cross-border transactions, then providing certain quotas to all the banks there to sort of like, in a way, it's a little bit of maybe a test experiment to see how we can do a transaction that we can make a loan in either one country and then use cash collateral in the other, or maybe use standby LC in the other and so forth. That type of activities, I don't know for sure that what the policy will be in 2012. At this point, we don't expect that there will be continued growth in the Hong Kong and Shanghai market, which we were doing a few hundred millions of this type of activities. 2011. Given that, I think that we will continue to have relatively normal growth in the U.S. market, and we'll have to see what the policy will be in China and then go from there. But we have pretty high confidence that just in U.S., we actually have a pretty good pipeline of potential business. But still, I think that the plan is not to just have a very aggressive loan production, because I think in 2012, without a doubt, there will be a lot more banks coming to the market, and they're all going to be focusing on C&I. Naturally, we should expect that because of competition, we would not have a very strong growth, in terms of loan origination. Okay. Thank you very much. Our next question comes from Julianna Balicka from KBW. Please go ahead with your question. Good morning. Great quarter. Thank you. I have a couple follow-up questions on housekeeping. In terms of the accretable yield income amount that you had been giving us each quarter, what is the remaining amount of accretable yield income that you have to accrete over time? Juliana, it's $161 million at the end of the year. Okay, great. In terms of the scheduled accretion in the fourth quarter, what was that dollar amount this quarter? The scheduled, not the unscheduled. The total accretion in this quarter was $19 million, a little bit high. Normally, what we project and forecast is about $15 million. Right. That's right. That makes sense. Okay, very good. Depending on the cash activity that happens, sometimes it's a little bit higher, sometimes it's a little bit lower. But given kind of the history and the performance that we've seen, what we forecast is about $15 million a quarter. Makes sense. Great. A final housekeeping question, and I'll step back. In terms of your TDRs, what is your non-accruing TDR number, please? The non-accruing TDR? Yeah, non-accruing, non-covered. Oh, you want the accruing TDR, right? Yes, correct. Accruing. Okay. Accruing. Yeah. Because the non-accruing TDR is already in our NPA number. Yeah. No. I need my coffee more than that. The accruing TDR was about $100 million, so up a little bit from where we were as of September at $20 million or so. But under the accounting standards for this, some of these will roll off after disclosure in the 10-K, and at this point, we think at least $60 million of that $100 million will roll off at the next 10-Q, 10-K season. Very good. Excellent. Thank you very much. Our next question comes from Brett Rabatin from Sterne Agee. Please go ahead with your question. Hi. Good morning. Morning. Wanted to get a little more clarity maybe on the margin and just kind of thinking through the guidance for the first quarter and the full year. Maybe, Irene, can you help us kind of walk through the dynamics of the margin pressure in 1Q in terms of the non-covered portfolio yield? Just if the dynamic of lower funding costs is just going to be so much less of an offset that the margin pressure is just coming from, I am assuming, mostly loan yields and securities as well. Brett, that is exactly correct. Obviously, as expected in the fourth quarter, the loan and the securities yields decreased. We were able to offset that with higher than expected decrease in the cost of deposits, mainly because we reduced the cost of the time deposits. But when we look towards next year and in the first quarter, that type of percentage decline, 10 basis points quarter-over-quarter, is pretty high, so we do not expect that to recur at that level. So with the combination of those two forces, we do expect that the margin will decline from the level it was in the fourth quarter. As we just talked about with Juliana as well, we did have a little bit more accretable income in the fourth quarter, and we forecast about $15 million in the first quarter and for the rest of 2012. Okay. What are you seeing in the securities portfolio? Was there any increased premium amortization? What are you buying? What does the duration of that portfolio look like at this point? Yeah. No kind of increase in the premium amortization on that. Nothing unusual of that nature. Overall, the yields are coming down as we put on new securities where the yields are a little bit lower as they mature. But overall, the duration is still pretty short on the securities portfolio. I think you can see that in our yields. It is a little bit over 2 at this point. Okay. Great. Thanks for the color. Our next question comes from Aaron Deer from Sandler O'Neill & Partners. Please go ahead with your question. Hi. Good morning, everyone. Good morning. I just wanted to, I guess, follow up on the commercial loan growth that you had during the quarter. Can you talk about what percentage of that was trade finance versus more traditional commercial lending? And of the overall commercial portfolio, what the mix of that is in terms of trade finance today? Roughly about 30% trade finance, 70% C&I. That has been kind of the percentage split between the trade finance and the regular C&I. Okay. The expectation for loan sales going forward, any color you can give on that in terms of if your residential production is going to drift lower or if you're going to be ramping SBA, and if that gives you other opportunities on that front? We'll continue to. We have been increasing our SBA lending, so whatever that makes sense for the SBA loans to be sold each quarter or every other quarter, we'll continue to do that in 2012. Okay. All right. Thanks for taking my questions. Our next question comes from Gary Tenner from D.A. Davidson. Please go ahead with your question. Thanks. Good morning. I just had a follow-up to Brett's question regarding the margin for next year. If I heard correctly, you talked about a 385 margin on a core basis on average for the year. Is that right? Correct. Okay. I guess what I am trying to understand, or maybe I am just missing something here, given the expectation for much slower asset growth, I think you have a 2% number in your guidance. Given the ability to be pretty aggressive if you are only having that kind of growth on reducing deposit costs, as you guys pointed to the CDs that are maturing in the first quarter, I would have thought that the limited balance sheet growth would have translated into a little more support to the margin. What am I missing there? I think if you look at our yield on the loans, especially commercial real estate loans, there are a lot of those loans that either were intermediate fixed that were originated a few years ago at higher rates or have floors that are higher. So we do expect the loan yield will continue to drop. As far as the deposits, there will be some limit. Last quarter, we had a pretty good reduction in cost of deposits of 10 basis points, but it will not continue to go down that much. As a result, the likelihood is our margin will be drifting down throughout 2012. Yeah. Also, when you look at an average of cost of deposit at 64 basis points, obviously, there is only so much room to come down. From 64 basis points to zero, there is only so much you can go down. But if you look at a good example, you look at a commercial real estate, we do have quite a few commercial real estate loans with floor rate at even 5.5% or 6% and things like that. With this very intense competition in the market, some of these floor rates have to drop off. So, to a certain degree, obviously, when you are in at that high rate level and coming down, there is going to be a lot more to come down than the other way around. We have been doing a pretty good job, actually, at holding on a lot of these clients and charging them a slightly higher rate than what the market is offering right now because of using service and some of the other additional value proposition that we offer to our clients. But at the end of the day, I think just logically, we think that there is going to be a high likelihood the loan yield and the investment yield coming down will be in a little bit of a larger magnitude than the cost of fund and the cost of deposits decrease. Given that, we are not giving up in terms of making sure that we will do our best to maintain the yield as much as we can on these loans and securities. In that regard, I think that a good example in the fourth quarter, we have every expectation that the margin should come down. But then because knowing that the margin would come down, we worked very hard to make sure that we're trying to ratchet down the deposit rate even more. We were quite successful in doing that, and we were very pleased to see the result. That's just something that every quarter we're going to do our best. I think from a reasonable point of view and logical point of view, we just think that the margin will come down. Okay. Just a reminder, I missed the rate that you had applied to the $2.5 billion of time deposits maturing in the first quarter. It's about 80 basis points. I'm sorry, 80 basis points? Correct. Okay. Thanks for taking my question. Once again, if you would like to ask a question, please press star and then one using a touch-tone telephone. Our next question comes from Jennifer Demba from SunTrust Robinson. Please go ahead with your question. Thank you. Good morning. Just curious, is there any consideration being given to tendering the remaining non-TARP preferred stock instead of doing some portion of the planned share repurchase? Looks like it might be somewhat neutral to earnings either way. Jennifer, that is not convertible until April of 2013. Okay. With the dividend yield that is higher, there's no incentive for the shareholders to tender or convert that at this time. But we have the right to convert that in April of 2013. Okay. Thanks a lot. Our next question comes from Herman Chan from Wells Fargo Securities. Thanks for taking my call. Can you give us some color on the rates you're getting on new production on the commercial side? And have spreads demonstrated any sort of stability from a potential pullback from European-based lenders in your markets? Question, Herman? Sure. Have spreads demonstrated any sort of stability from a potential pullback from European-based lenders in your market? We think that the competition is increasing in term of commercial loans because pretty much all banks want to increase their commercial loan portfolio. So the yield that we are getting right now, roughly about LIBOR plus 300 to 350, on those commercial loans. Okay, great. That hasn't changed substantially, Herman, over the last several months. Right. Yeah, actually, it's been relatively stable in terms of what we've seen so far. At this point, we don't expect to be that dramatic of a competition that will cause the rate to ratchet down substantially. But on the other hand, competition is out there. There are more smaller banks coming into the competition because, after two or three years, maybe finally they're healed from the enforcement actions, and they're ready to come back to the market and take on some C&I loans. So we're seeing a little bit of that. Right. So it sounds like if your residential mortgage continues to grow, that sort of mix shift into resi should be beneficial to the overall loan yield then. Yes. Right now, from the yield perspective, we are able to get close to 5% because of the combination of the lower rate for the three year versus the higher rates on the seven years. Right. Okay, great. My second question, following up on your comments on loan branch consolidation this year. You also mentioned that you could add branches elsewhere. Are there any specific geographies that you find particularly attractive? Not at this point. I think that we're always going to be looking for any potential strategic location that makes sense for us. I think our approach is that it's a combination of both geographic location, but more importantly, human resources. If we identify a strong team that we think that can have a high assurance of strong production on business that's very much relevant to our core strategy, then we will put the money in and open a branch for those teams. I think the approach is a little bit more based on people versus geographic region. Okay. Thank you very much. We have a follow-up question from Juliana Bilicka from KBW. Please go with your question. Hi. Thank you for letting me follow up. To circle back on the margin question that had been asked just a couple of questions ago. In terms of the margin throughout the year, it makes sense that it would drift down, given the yield pressures that are being faced by all the banks. But in terms of the margin from 4Q to 1Q, it looks like there's a pretty steep drop between 4Q and 1Q, and then it's just a little bit of a taper. Is it fair to say, does that imply that there's a big chunk of loans coming up for renewal in 1Q, or is it more that the drop between 4Q and 1Q in your guidance is more of a conservative approach, and there's a good chance that that will kind of ease in over maybe a couple quarters? Well, one of the thing is that accretion on the 4Q, at $19 million, we think that is on the high side. We wanted to make sure that we are not too aggressive in assuming that we have a higher accretion. But in terms of the loan repricing, is that something that's going to be gradual over 2012, or is there a large wave of repricing coming up? It will be gradual, but it would be a different amount in each quarter. Not all, but at different time, there may be more repricing. Okay. Thank you. At this time, I would like to turn the conference call back over to management for any closing remarks. Well, if there's no more question, I want to thank you all for joining us on this call, and we look forward to talk to you again in April. Thank you. The conference is now concluded. We do thank you for attending today's presentation. You may now disconnect your telephone lines.