Earnings Call: Q4 2010

Jan 26, 2011

Good day, and welcome to the East West Bancorp fourth quarter 2010 earnings conference call and webcast. 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 a 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, Vice President. Please go ahead. Good morning, and thank you for joining us to review the financial results of East West Bancorp for the fourth quarter and full year 2010. Here to review the results are Dominic Ng, Chairman and Chief Executive Officer, Julia Gouw, President and Chief Operating Officer, and Irene Oh, 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 SEC, including our annual report on Form 10-K and for the year ended December 31, 2009. Today's call is also being recorded and will be available in replay format at eastwestbank.com and streetevents.com. I will now turn the call over to Dominic. Thank you, Kelly. Good morning, and thank you for joining us on today's call. Yesterday afternoon, we were pleased to report financial results for the fourth quarter and full year of 2010. As announced yesterday, East West reported earnings for the fourth quarter of $56 million and $165 million for the full year. Our fourth quarter earnings were $9 million or 20% higher than the third quarter of 2010, and our earnings for the full year 2010 were $88 million or 115% higher than 2009. Our results for the fourth quarter of 2010 mark the fifth consecutive quarter of solid earnings and record full-year earnings for East West. Looking back, 2010 marks the end of an extraordinary decade in the history of East West. Over the past 10 years, East West has grown over 800% from $2.5 billion in total assets in the year 2000 to $20.7 billion at the end of 2010. We began the decade as a small community bank and grew to a bank with international operations and over 130 branches. We have created long-term value for our shareholders, increasing our market capitalization from over $500 million to over $3 billion. Through both our organic growth and successful acquisitions, including the instrumental FDIC-assisted acquisition of United Commercial Bank in 2009, East West has now grown to be the 30th largest publicly traded bank in the nation. The bank achieved many accomplishments during 2010. We set up strong internal goals for specific loan and deposit growth and met them. We increased C&I loans by $480 million or 32% year to date. Core deposit growth was equally impressive at $1.8 billion or 25% year to date. Credit quality is stable and both provision and net charge-off levels decreased throughout 2010. For the fifth consecutive quarter, non-performing asset levels were under 1%, and both provision and net charge-offs decreased quarter over quarter. With our expanded strength and size, we believe that we will continue to win new business and continue to deliver strong financial performance in 2011 and beyond. Over the course of 2010, we have made investments in both our people and technology that are positively and profitably benefiting us. We are focused on delivering superior customer service to our customers and expanding our cross-border business through our expanded domestic and international footprint. I am also pleased to report that East West has been recognized by both Fortune and Forbes magazines. Fortune recently named East West as one of the 10 best stocks for 2011, the only banking institution to make the list. Additionally, Forbes magazine recently published that East West was its number two pick for the best bank in the nation. While the accolades and recognition are nice to hear, we know that we need to deliver strong earnings and shareholder value year in and year out, and we are confident that we will be able to do so. In our earnings release, we provide guidance for the first quarter and full year of 2011. We currently estimated that fully diluted earnings per share for the full year of 2011 will range from $1.44 to $1.48, or an increase of approximately 73% to 78% from 2010. This earning per share guidance is based on overall asset growth of approximately 5%, provision for loan losses of $95 million to $100 million, and an adjusted net interest margin between 4.15% and 4.25%. We currently estimated that fully diluted earning per share for the first quarter of 2011 will be from $0.33 to $0.35 per diluted share. This earning per share guidance is based on the following assumptions: a stable balance sheet, a stable interest rate environment, and a net interest margin between 4.15% and 4.2%. Provision for loan losses of approximately $25 million to $30 million for the quarter, and non-interest expense of approximately $100 million, net of amounts to be reimbursed by the FDIC. Lastly, effective tax rate of approximately 36%. Driven by the lower credit costs, growth in selective loan portfolios, and improved operating efficiency, we fully expect that core earnings will continue to increase throughout 2011 and beyond. In closing, over the last decade, we have grown tremendously and increased our franchise value significantly. As we enter a new decade in the history of East West, I am confident that we will meet challenges head-on and continue to grow and increase shareholder value for the next 10 years and beyond. I will now turn the call over to Julia Gouw to speak in more detail about the strategic action that East West has taken recently. Thank you very much, Dominic Ng, and good morning to everyone. East West Bank has spent much of 2010 positioning itself for post-recessionary growth from its new position as the 30th largest publicly traded bank in the nation, and the largest bank serving the Asian American community. We have strengthened our infrastructure by making substantial investments in people, systems, and processes to support the next phase of our growth and development. We continue to diversify risk in our balance sheet, focus on strategies to diversify income sources, and generate more fee-based revenues. In 2010, we reduced our real estate concentration of non-covered loans by $372 million, or 6% year-over-year. As of December 31, 2010, the total non-covered, non-real estate loans increased to 34% of our non-covered portfolio as compared to 25% at the end of 2009. We have been able to increase the interest income while reducing our real estate exposure because we have been very successful in growing other loan categories, C&I and trade finance, and other consumer loans. Non-real estate loans grew $588 million or 28% year-over-year. C&I and trade finance growth was $480 million, or 82% of the non-real estate loan growth. We have grown the C&I portfolios throughout the year and also ended 2010 strongly. The fourth quarter C&I loan balance growth of $287 million represented a 17% increase since September 30, 2010 to $2 billion, a record increase for East West. I would like to point out that these C&I loan numbers are for non-covered portfolio only. Including the covered C&I loan portfolios acquired from United Commercial Bank and Washington First International Bank, the book balance of our total C&I loan portfolio was $2.9 billion as of December 31, 2010, or 21% of our total loan portfolio. Total non-real estate loans increased to 29% of our total loan portfolio at December 31, 2010, as compared to 23% at December 31, 2009. Building our C&I lending platform is an ongoing initiative that we will continue to focus on the new year. Throughout 2011, we will continue to focus on C&I loans, ensuring that appropriate investments are made while maintaining operating efficiency and superior customer service. Shifting gears slightly to operating expenses. Non-interest expense increased from $100 million in the third quarter to $114 million in the fourth quarter of 2010. The main driver of our increase in non-interest expense was higher other real estate-owned expense. Other real estate-owned expense grew to $17 million in the fourth quarter, compared to $6 million in the third quarter. The higher expense in the fourth quarter was largely related to the write-downs and expenses of $10 million on covered other real estate owned, of which 80%, or $8 million, is reimbursable by the FDIC. As mentioned before, under the loss share agreements with FDIC, 80% of eligible expenses on covered assets are reimbursable from the FDIC. In the fourth quarter, we incurred $16 million in expenses on covered loans and other real estate owned, 80%, or $13 million of which we expect to be reimbursed by the FDIC, and which is recorded as an increase to the FDIC receivable as non-interest income. Excluding the reimbursable portion of $13 million, non-interest expense totaled $101 million, an increase of $9 million from $92 million in the third quarter. Aside from the expense related to loss share assets, quarter to date increases in non-interest expense came from higher consulting expenses, a small increase in compensation and employee benefits, and other operating expenses. Based on our current run rate, we anticipate that in the first quarter of 2011, non-interest expense will total approximately $100 million, net of any reimbursable amounts from the FDIC that are shown gross up on the income statement. In addition, we did see some noise in our non-interest income for the quarter as well. We reported a net non-interest loss of $17 million during the fourth quarter. The loss was primarily caused by a net decrease in the FDIC indemnification asset and receivable of $36 million, which Irene Oh will discuss in further detail. In addition, during the quarter, the company recorded $6 million in gains on sale of loans, primarily from the sale of $207 million in student loans, and a net gain of $5 million on investment sold. Additionally, as of December 31, 2010, we classified $230 million loans held for sale, primarily student loans. As we continue to sell student loans on an opportunistic basis, we felt for part of the portfolio, the held for sale categorization was more appropriate. Further, in the fourth quarter, we recorded impairment on investment securities of $6 million and a purchase accounting adjustment of $5 million. The impairment was recorded on private label mortgage-backed security that we own, the only private label MBS security in our portfolio. Additionally, in the quarter, we recorded purchase accounting adjustments of a net $5 million. This amount was comprised of fair value adjustments on affordable housing investments from UCB and a small reduction in the assets acquired from the FDIC on the WFIB acquisition. Because the discount bid was a function of total assets, we had a purchase accounting adjustment when the assets decreased. Excluding these non-core items, our operating non-interest income increased in the fourth quarter to $18 million, up $883,000 or 5% from the third quarter of 2010. As a final note, on December 29, 2010, we exited the TARP Capital Purchase Program during the quarter and repaid in full the $306.5 million of Series A preferred stock issued to the U.S. Treasury Department under the TARP program. We would like to emphasize that because of our excellent capital level, current profitability, and strong future earnings growth, East West was able to exit TARP without raising any capital. Throughout 2010, we stated that it was our goal to repay TARP without raising any additional capital, and I am very pleased to report that we successfully achieved our goal. Further, we are pleased to report that we have reached an agreement with the U.S. Treasury to buy back all outstanding warrants for a total purchase price of $14.5 million. This transaction is expected to close today. Even after the repayment of TARP, our capital ratios are among the highest in the nation. As of the end of the fourth quarter of 2010, our Tier 1 Leverage capital ratios total 9.3%, Tier 1 Risk-Based Capital ratio total 15.9%, and our Total Risk-Based Capital ratio total 17.6%. East West exceeds well-capitalized requirements for all regulatory guidelines by over $800 million. The conclusion of our participation in this program will save the company $50 million in preferred dividend payments, or approximately $0.10 per diluted share on an annual basis beginning in 2011, which will allow us to continue to invest in our franchise and will have a direct impact on shareholder value. In light of our continued strong profitability and capital, we plan to reevaluate our current common stock dividend level in the coming quarter. Overall, we feel that our new position of strength and focus on our strategic initiatives will assist in propelling us forward in 2011 and result in improving operating efficiencies and a better experience for our customers. With that, I would now like to turn the call over to Irene, who will discuss our fourth quarter 2010 financial results in more depth. Thank you very much, Julia, and good morning to everyone. I would like to provide a little bit more insight into our financial results for the fourth quarter and then also asset quality. The net income for the fourth quarter of $56.3 million or $0.22 per diluted share was an improvement of $9.4 million from the third quarter of 2010. Net income for the full year 2010 of $164.6 million was an improvement of $87.9 million from the prior year. I would like to point out that the net income available for common shareholders for the fourth quarter of 2010 includes preferred stock discount accretion of approximately $18.7 million or $0.13 per diluted share as a result of the repurchase of preferred stock issued under the TARP program. Excluding this amount, East West earned $0.35 per diluted share, $0.08 or 30% more than the third quarter. During the fourth quarter, our interest income and non-interest income were impacted by certain covered loan activity. As such, I would like to spend some time discussing this activity. As we mentioned in our earnings release, after actively managing the UCB covered loan portfolio for approximately one year, we have resolved many problem loans and concluded that the credit quality is better than originally estimated. The improvement in credit quality was a direct result of the hard work and successful resolutions of our seasoned workout team who effectively managed these relationships and worked tirelessly to mitigate any credit weaknesses. As a result of the improvement in credit quality, we lowered the credit discount on these loans in the fourth quarter and increased expected cash flows. Our original credit discount was approximately 20% of the UCB covered loan balances, and we have now reduced this to approximately 14%. By lowering the credit discount, interest income will increase over the life of the loans. Our interest income for covered loans totaled $142.3 million for the fourth quarter of 2010. This amount is gross of the net impact of interest income for the quarter, resulting from the decrease in the credit discount and disposition activity of $43.8 million. Correspondingly, with the lowered credit discount, the expected reimbursement from the FDIC under the loss-sharing agreement will also decrease, resulting in amortization on the FDIC indemnification asset, which is recorded as a charge to non-interest income. Going forward, the company will continue to record amortization on the FDIC indemnification asset. In the fourth quarter, we recorded a net reduction in the FDIC indemnification asset and receivable of $36 million. This net reduction of $36 million is comprised of a net decrease of $43.8 million due to the disposition of covered loans and amortization of the FDIC indemnification asset, partially offset by an increase of $13 million due to expenses reimbursable by the FDIC. Additionally, this amount includes a net decrease of $5.2 million related to recoveries and settlement adjustments. The $43.8 million is essentially representative of 80% of the amount that impacted our net interest income as a result of the covered loan activity and the increase in the accretable yield. The core net interest margin, excluding the impact to net interest income of $43.8 million, totaled 4.43% for the quarter. This fourth quarter margin of 4.43% reflects an increase from 3.98% in the third quarter of 2010 of 45 basis points. Not only has credit quality for the UCB legacy portfolio improved, the credit quality on the East West legacy portfolio continues to improve. For the fifth consecutive quarter, both net charge-offs and the provision for loan losses have declined. The provision for loan losses was $29.8 million for the fourth quarter of 2010, a decrease of $8.8 million or 23% compared to the previous quarter. Total net charge-offs decreased to $38.3 million for the fourth quarter, a decrease of $6.7 million or 15% from the previous quarter. Our non-performing assets to total asset ratio, which remains under 1%, continues to be substantially better than our peers. Non-performing assets, excluding covered assets, remained low at $194.8 million or 94 basis points of total assets at year-end. NPAs, excluding covered assets as of December 31, 2010, included non-accrual loans totaling $172.9 million and REO assets totaling $21.9 million. I am pleased to report that the movement into non-accrual loans decreased substantially in the fourth quarter to about $70 million. Additionally, as of year-end, TDRs totaled about $120 million. At this point in time, at least 50% of these TDRs have rolled off. As stated in the earnings announcement 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 dividend of $0.01 is payable on or about February 24, 2011, to shareholders of record on February 10, 2011. The dividend on the Series A preferred stock of $20 per share is payable on February 1, 2011, to shareholders of record on January 15, 2011. I will now turn the call back to Dominic. Thank you, Irene. I will now open the call to questions. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been answered and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Andrea Jao of Cowen and Company. Please go ahead. Good morning, everyone, and congratulations. Thank you. Can you hear me? Yes. Your assumption regarding loan loss provisioning for 2011 is an important component of your 2011 outlook. Just wanted to get more color or more detail on what went into that assumption of $95 million-$100 million and your confidence in that range. We feel pretty comfortable given the trend in the last few quarters. Our non-performing assets continue to be below 1%. If you look at our charge-offs, continue to decline each quarter, and we have a very healthy allowance for loan losses. As the economy at least stabilized and started to get better, we feel that the provision of $95 million-$100 million should be adequate for 2011, especially in light of the fact that most of the charge-offs and losses come from construction land loans where if the property value do not decline substantially more, then we probably will see the charge-off subside compared to 2010. Great. I have a follow-up question regarding investment spending. What kind of investment spending costs and initiatives should we expect for 2011 that helps assure your place among the bigger regional banks? Thank you. Well, the key G&A expenses that we think that it will have some increases are primarily from the people side. We actually have started basically in 2010, and throughout. For the fact that we have a very strong commitment to grow the C&I portfolio, and in the next five years to make sure that our balance sheet five years from now would have a very balanced approach to the overall portfolio. In essence, decreasing the real estate overall exposure and increasing the C&I and diversify the overall lending portfolio. In that regard, we have to not only ask our existing lending officers to all step up to work harder to bring in more C&I relationships. We also find that it is extremely advantageous at this stage in this type of economy with this current banking environment to recruit people also throughout the industry. We have some successes in 2010. We will continue to do that in 2011. So it's a combination of both bringing the people and also gradually increase different type of products that we think that can make the C&I relationship stickier going forward in the future. We're offering more sophisticated products to our customers. Also by doing that, help East West Bank to move to another level of sophistication in terms of, let's say, five, 10 years ago, we may win by relationship, but from a product point of view, from a technical point of view, we may not be able to compete with some of the larger banks. But in today's world and going forward, we feel very confident that not only that we can cover very small entrepreneurial customers, but we are now able to take on many more of the larger size clienteles because of the product offering that we provide. To do that, we need to continue to upgrade our technology, upgrade our people, and just keep investing in this arena. Through that, I think that not only that our expenses will gradually increase, but most importantly, our revenue will proportionally increase even bigger. Great. Thank you so much, and happy New Year. Happy New Year. Happy New Year. Happy Chinese New Year, too. Great. Thank you. The next question is from Jonathan Elmi of Macquarie. Please go ahead. Hey, thanks very much, guys, for taking my questions. Just wanted to take a look at the reported yield on the covered loans. It looks like that came up to about 11.60 this quarter versus 7.31 in the third quarter. I guess I just wanted to be clear exactly how much of that delta related from the change in your purchase accounting assumptions with regards to the credit mark on the covered loans. Jonathan, if you look at that number, so it was $142.3 million. If you reduce it by the net impact of covered loan dispositions and amortization of $43.8 million, it is $98.5 million. So that delta between that and the third quarter, if you do the same analysis, is about $10 million. So part of that had to do with this change where we are reducing the credit mark, and we will have more accretable income. Additionally, during the quarter, we also had a little bit of additional cash flow, cash recovery. So it is a combination of the two. Okay. But would you say that the majority of that $10 million, though, is related to the change in assumptions? Yeah. Majority of the increase is because we are reducing the non-accretable discount coming from the credit marks to accretable discounts. Right. Got it. Understand. Yes. Mm-hmm. Okay. Just looking at your margin guidance for 2011, how much of that change in the credit mark is driving that margin guidance, if any? Generally speaking, most of the increase in the margin is related to this change in the credit mark. All the other items that we think are assumptions as far as the cost of deposit, what is happening with the other loans and investments, it pretty much nets out. The increase is really related to the cover loans, Jonathan. Okay. Got you. Thanks very much, guys. Thank you. The next question comes from Ken Zerbe of Morgan Stanley. Please go ahead. Great. Thanks. The first question I have is just on capital. I know you mentioned you are going to reevaluate your dividend going forward. Maybe just kind of summarize your views on dividend payout ratio. You are targeting sort of a 30%, so what is that next step? Also if you can put that in context with potential share buybacks and the timing of those. Thanks. Yeah. First thing we would do is to increase the dividend in the next quarter. We will be pretty conservative in regards to the payout. Then we take a look. If we have opportunity to go to the balance sheet, then we will not have to do buyback. However, based upon future capital and what kind of earnings, what kind of growth we have, one, we may continue to increase the dividend, and two, we will evaluate potential stock buyback as part of our capital management. I think capital management is an ongoing process. At most East West Bank board meeting, we always go through this exercise. You can pretty much count on an ongoing basis, we will continue to evaluate what is the optimal level of dividend or any kind of potential type of activities, buyback. We will evaluate it. But at this stage right now, I think that it will be a bit too early for us to be able to tell you one way or the other. But I think that as time goes by, you can pretty much count on that management will actively look into our capital ratio and then make the, what I call, the prudent judgment going forward. Is that too early because you just repaid TARP and it is more of a regulatory issue, or is it because it is too early because you are seeing exceptionally strong loan growth and you may need it for loan growth instead? Well, we do things always one step at a time. It is the same thing that we actually have way too much capital totally ready to pay off TARP the minute that we actually finish the UCB acquisition. We take our time to make sure that the economy is as strong, earning is really, really strong, and when everything is in place, then we will step up to pay off TARP. Just by doing that, I think it is not just prudent management and board decision in terms of overall risk management. I think that by doing that, we give better credibility to the regulators. They always know that we are very concerned about safety and soundness and overall risk management. I think sometimes it works out better because everything goes much smoother by being a little bit more prudent than we always jump the gun too fast or be the first one to. We do not want to be the first one to receive TARP and the first one to jump out and that kind of stuff. For these type of activities, I think that for a quarter or two lag probably is okay. A quarter or two. Okay. The other question I had, just in terms of C&I loan growth, obviously very strong. In terms of your guidance that you gave for 2011, did you have any implicit loan growth assumptions in there? I would say that in the fourth quarter, the increase of $285 million is very, very strong. We expect slightly lower, but we do want to emphasize and grow the C&I portfolio. I believe that the momentum will continue, but I would say that probably 25% annual increase to that $2 billion would be a doable goal. Okay. Great. Thank you very much. The next question comes from Brett Rabatin of Sterne Agee. Please go ahead. Hi, good morning. Morning. Wanted to ask, I'm just curious about M&A. I wanted to hear some thoughts, if possible, on the ICBC transaction for Bank of East Asia, and how you view that deal potentially and the pricing and your thoughts on generally the M&A market. Well, I think that's good news because, again, that's another transaction that show pretty decent pricing out there, that it shows that banks activities in the M&A side has start picking up with much more better pricing. And I think that's good for the banking industry. Both banks are very friendly bank with East West, so I think that this is something good to see that they have actually a good transaction they put together. The other thing that I think will be very interesting to watch is how long it takes for the U.S. and China regulatory bodies to approve the transaction because, as you know, this is an unprecedented transaction in terms of a 70% Chinese government owned bank acquiring a U.S. domestic financial institution. This will be new to the history of U.S., and so how soon it will get approved and so forth, I think will be something that everybody in the banking world globally would like to see how it goes. So we all are interested to see how it progress, and then also as friend of ICBC and Bank of East Asia, we love to see that this goes smoothly. Okay. I wanted to follow up on just the covered loan portfolio and ask the question about what the progression might be in terms of the accretable discount going forward, and then how we should think about the 2011 quarterly yield on the covered portfolio, excluding the amortization of the FDIC indemnification asset. I think that the margin that we give would be pretty stable. So 415-425. That includes the new assumptions on the accretion of the discount. I would say that in the next few years, unless there are major changes in the shift from non-accretable discount to accretable discount, you can use that 415-425 as a guidance for our margin. Okay, thank you. The next question is from Mike Zaremski of Credit Suisse. Please go ahead. Hi, good morning. Good morning, Mike. On the NIM guidance, if I look this quarter, your non-covered loan yields rose, your securities yields rose. I am curious, do you think that you are going to continue reinvesting at higher rates in the securities portfolio? I am curious how the non-covered loan yields rose, given it seems like a lot of it was from C&I growth, which I thought had lower yields. I think in term of investment securities, we are very cautious, so we do not expect interest rates went up slightly, and that is why we took advantage. If you look at the increase on the investment securities, because they are all very short, the yield is pretty low. Unless interest rates go up, I would say that we should not expect any increase in the yield. In term of the non-covered, I think that the new loans are coming in slightly lower. However, some of the renewals on the existing loans have slightly increased. It is a small change, and we expect the margin probably to be somewhat stable for 2011, unless we see major changes in the market interest rates. Okay. Just curious, since you guys are a much bigger bank now, has your philosophy on M&A changed at all? Did you guys ever look to do deals with non-Chinese American-focused banks? I am just curious. Well, if I look at for the last 10, 12 years, we actually had made two acquisitions with non-Asian financial institution, and it worked out pretty good in terms of integration and retention of customers. That all worked out really well. It is something that it was not, it is not like that we had not done it before, so it is something that we were very, very comfortable to do. It is just that by and large, for the past decade, we have always found better value and better synergy from the Chinese American banks that we acquired. The fact is, the other two non-Asian banks that we acquired, retaining customers were not an issue, integration were not an issue. Therefore, we feel very comfortable to do that if we think that overall, that will help create additional shareholder value. Now, that being said, I think going forward, yes, we will look at any kind of combinations, but naturally, we always seem to find there may be a little bit better synergy or maybe more accretive type of transaction from the Chinese American space because we are the most dominant force in the Chinese community from a banking point of view. Obviously, when we do that type of transaction, we will have much higher likelihood through consolidation and so forth to have better cost savings. With that, I think that we'll continue to look, but one thing I wanted to highlight is that our organic growth is going pretty well, and also our C&I initiative is our first and foremost number one priority. Also, we will continue to focus on being that financial bridge between East and West. That means that the cross-border transaction, the interworking relationship between our U.S. branches and our branch in China and Hong Kong, et cetera, will become much more critical, and we will put a higher priority of focus into these two arenas. With that, it will make M&A transaction, I would say, a little bit less of a priority, simply because unless something is really, really attractive, we do not want that to be a distraction to our current momentum because we are doing really well right now by bringing in new talents, upgrading the products, technology, and also making some really nice momentum and growing core deposit business, checking accounts, C&I loans, international trade finance, helping entrepreneurs from China investing in the United States, vice versa. These are things that are really important for our long-term value. Therefore, despite the fact that there are still plenty of Friday night specials from the FDIC that we have not yet taken into a plunge into this direction at this stage. Okay. Thanks for taking my question. Good quarter. Thank you. Thank you. The next question is from Christopher Nolan of CRT Capital. Please go ahead. Hi. Good morning. Good morning. Could you please clarify a little bit on the C&I loans? Are these mostly from smaller businesses or larger clients? Is there a mix in terms of the clients that is driving the growth? Well, now that we are bigger, many of our customer base are also bigger. These are more middle-market businesses where the loan size are bigger, and that is why it is a lot easier for us to grow our C&I portfolio because we now have very high capital levels and can serve a very wide range of middle-market businesses. Okay. Julia, that is the primary driver for the C&I growth? Yes. I wanted to also highlight and then caution that the last two quarters have been a relatively decent banking environment from a competitive point of view because many of the banks in California are still somewhat struggling or maybe have internal issues that are preoccupied, their own internal issues. It makes our efforts of going after new business much easier. Also, the attacks from other banks to our existing client base is not as intense as it were, let's say, three to four years ago. I think that we were able to capitalize on this great timing, and we work hard knowing that this is a great timing because the nice thing about C&I loans is that once you bring them in, as long as you do a really good job to take good care of them, you earn their trust and their loyalty, they'll be with us for a long, long time. If they are good, profitable business, they will be there for a long, long time, and they will help us to grow our balance because when they grow, our balances grow too. That's why we spend a lot of efforts and work really hard to try to bring as many as we can, particularly these very profitable business out there, and making sure that we can earn their trust going forward in the future so that we don't have to work that hard, let's say, three, four, five years from now because who knows what the market will be like a year or two from now because when all the banks start, get through with their own capitalization and then get through with all the internal issue, when they get out of MOU and C&D, they're all going to be coming back, and everybody wants to do C&I. At that point, we better have a pretty strong portfolio that we can sit on and then hope for our clients to grow, and then so that we can grow with them. That's pretty much our current strategy right now. Going forward, I think that my prediction is that within a year or two, there are going to be some very, very intense competition in the C&I arena. Is there a limit in terms of how much you will grow C&I as a percentage of total loans? No. We would like to see that someday C&I portfolio represents 30%-35% of the total portfolio. Great. Thank you. I will take- At this point, we are already at that stage for the non-cover loans. If we just divide it into the legacy East West and the legacy UCB, the legacy East West, at this stage right now for the non-real estate loans, already at 34%, 35%. C&I is 80% of that total. So it is already in a pretty good shape. However, the UCB legacy loans, we still have a lot of real estates in there. Therefore, if we add them all up together, we are still not quite there. Also when you add it up together, it is a much bigger balance sheet, and therefore, even though the dollar amount that we grow right now looks pretty good, to the total portfolio, it does not move the needle that quickly. Our plan is that in 3 to 4 years, we want to get there. Okay. Thank you for taking my call. The next question comes from Jennifer Demba of SunTrust Robinson Humphrey. Please go ahead. You just covered my question. Thank you very much. Nice quarter. Thanks, Jennifer. The next question is Joe Morford, RBC Capital Markets. Thanks. Good morning, everyone. Good morning. Also just following up on, I guess Christopher Nolan's question. If you look at the commercial loan growth in the period, how is that split between trade finance and more regular C&I, and what are the relative sizes of those two portfolios? Mostly, if you are talking about percentage, our trade finance represent about 30%-35% of total commercial loan. Okay. Yeah. Right. So that would be roughly the split between trade finance companies that are involved in import-export versus the entire commercial loan portfolio. Was the growth pretty well split between the two portfolios this quarter? Yes. Pretty similar. Okay. I guess, Dominic, I wondered if you could tell us a bit more about the current strategy for China. You've had a year or so to clean up the UCB portfolio and maybe make some changes to the team. What's the game plan for leveraging the full banking license you have given that it allows you to do some things that many of your competitors can't? Yeah, by the way, we just finished the cleanup. I think in December, the Chinese banking authority officially lifted all restriction from our banking subsidiary back in China because of all the problems that UCB had before, and they were put under pretty severe penalties, so to speak. We got everything cleaned up, and back in sort of two or three months ago, we got everything cleaned up, and then the banking authority came back in December and then lifted everything. So we are now in good shape to move forward. The plan is, again, I would emphasize, we are not interested in the tremendous growth opportunity in the consumer space in China. While it looks very attractive, we just didn't think that that will be the core strategy that East West can do well with. ICBC and Agricultural Bank of China and China Construction Bank, and also all of those banks would do a much better job than we are having all the branch network there. The things that we want to focus on primarily, it's going to be a very narrow focus, that is that for the last 19 years, we've been saying that we aspire to be the financial bridge between the East and the West. So the U.S.-China trade, the U.S.-China cross-border investment, those are the type of activities that we are most interested in. We have our branch in Shanghai, Shantou, and also Hong Kong, plus just a few other strategic rep office locations such as Beijing, Shenzhen, Guangzhou, and Taipei. All of these locations, I think that will allow us the opportunity to better serve our U.S. customers who are interested to do business with companies in China, whether they're importing or exporting or they're investing. Vice versa. What you see is that, as President Hu Jintao was in Chicago just last week, signing up a lot of deals, there are going to be a lot more business from China coming to United States. We want to make sure that we will do a good job to take on as many of these business coming from China to help them to invest wisely in U.S. so that we can create more jobs in U.S. and so forth. In the same token, because of that reason, more and more of our clients, particularly mainstream clients, are being attracted to the opportunity in China or the opportunity of forming joint venture with Chinese partners, either in China or in the United States. These are the kind of work that we're going to be focusing on, and that's going to be the primary focus of East West, and there's not going to be too much of a high likelihood that you will see us opening many branches throughout China and then start looking into what kind of strategies we can do to go after the local Chinese business or local Chinese consumer market in China. It's going to be everything have to do with what's happening between East and West and what's happening between U.S. and China trade and investment. Okay. That's helpful. Thanks, Dominic. Thank you. The next question is from Julianna Balicka from KBW. Please go ahead. Good morning. Good morning. Quarter. Most of my questions have actually been answered. It has been a pretty thorough Q&A session. Just a couple small questions, if I may. What was the dollar amount of restructured loans at the end of the quarter without covered loans, and what was the 30-89 delinquency without covered? The total TDRs as of 12/31 was about $120 million. As we said in our remarks, Juliana, at this point, it looks like about 50% of those have rolled off. The 30 to 89 day delinquency, I do not have that in front of me, but I can give you that after the call. Okay, very good. Thank you very much. Again, if you have a question, please press star, then one. Our next question comes from Aaron Deer of Sandler O'Neill & Partners. Please go ahead. Hey, good morning, everyone. Good morning. Most of my question has also been answered. I just want to follow up quickly on the margin guidance, though. Even recognizing the adjustment that you made in the quarter on the discount and the offsetting adjustments that you would have on the indemnification asset, it seems like your margin guidance seems a little low from what I might otherwise expect. I guess, how much are you including in there that would be discount accretion over and above what might be a baseline level? Yes. We are not really including any additional discount accretion above what we think the core is. Obviously, that is something that changes month over month, quarter over quarter, and from our viewpoint, it is not something that we can forecast it. Naturally, I think over the course of 2011, there may be some more, but as we cannot forecast that, we are not building that in right now. And you saw too, in the third quarter, there was very little additional cash activity, so our core margin was 398 basis points. That is why we are not building that in. Okay, and then just lastly, the deposit insurance cost in the quarter looked like it was down a bit. Is that due to a lower assessment rate or is that just some true-up or noise in there? We did have a small adjustment in the fourth quarter. Okay, great. Thank you. The next question comes from Ram Shankar of FBR Capital Markets. Please go ahead. Good morning. Congratulations on the quarter. Thank you. Thanks for taking my question. Just a follow-up to Aaron Deer's question, maybe. Just looking at your guidance for 2011, if we just gross up your 2010 assets by about 5%, take the implied net income from your guidance range, that's an ROA of just about 1%. At first blush, that kind of looks conservative given all the positive things going on in the franchise. Would you care to comment on that? Well, we would like to give a guidance that we know we can hit. We feel quite comfortable with our guidance. As the time goes by, we'll have more clarity about how conservative or additional income that we can generate. The most important thing is the provision because that's a big number. A big fluctuation on the provision can change the return on assets and earnings. Okay. Just so that I don't get this wrong, your NIM guidance for 2011 is what you would report on a GAAP basis? Is that a fair assessment? Correct. Once you net that, a net increase or decrease of the FDIC indemnification, when we say core margin every quarter, we net this amount that is sitting in non-interest income against the interest income. It is GAAP. It is GAAP, okay. One last housekeeping question. In terms of modeling, should we be modeling still $1.7 million per quarter of preferred dividends that is non-TARP related? Correct, yeah. Okay. That is for our Preferred A. Preferred A. We have about 85 million outstanding. Okay, thanks for taking my questions. This concludes our question and answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks. Well, thank you very much for joining us to this call, and we all look forward to speaking with you again in April. Bye-bye. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.