Earnings Call: Q3 2010

Oct 26, 2010

Good morning, and welcome to the East West Bancorp third 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, First Vice President. Please go ahead. Good morning, and thank you for joining us to review the financial results of East West Bancorp for the third quarter of 2010. Here to review the results are Dominic Ng, our Chairman and Chief Executive Officer, Julia Gouw, our 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, 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 all for joining us for today's call. We announced financial results for the third quarter of 2010 yesterday, and East West reported earnings of $47 million, or $0.27 per diluted share, $10.6 million, or $0.06 higher than last quarter. Our results marked the fourth consecutive quarter of solid earnings for the bank. During this quarter, we selectively grew commercial and trade finance and consumer loan portfolios and also posted strong deposit growth, particularly in low cost core deposits. Further, we have reduced operating expenditures and are realizing economies of scale from the recent acquisitions we have made. Just last week, last weekend, in fact, we successfully completed the core systems integration of Washington First International Bank. With the integrations of both recent acquisitions, United Commercial Bank and Washington First International Bank behind us, management and all the team members at East West are now concentrating our efforts on our strategic growth initiatives and providing better service for our customers. Building our C&I lending platform is a key area that we have focused on this year and will continue to focus on throughout 2011. I am pleased to report that we have made solid progress on this front. Quarter-over-quarter, commercial and trade finance loans have increased $167.3 million, which represents an 11% increase to $1.7 billion of loan balance. This increase in the third quarter of 2010 is a continuation of solid C&I loan growth earlier in the year. Over the last six months, we have increased C&I loan balances by $251.5 million, or 17%, from March 31, 2010. I would like to point out that these C&I loan figures do not include the cover loan portfolios acquired from United Commercial Bank and Washington First International Bank. Including the cover loan portfolios, the book balance of our total C&I loan portfolio was $2.6 billion as of September 30, 2010, or 19% of our total loan portfolio. We are also pleased to report that along with the loan growth, we have also grown deposits. Deposits grew to a record $15.3 billion, up $379 million or 3% from June 30, 2010. This growth was largely driven by growth in core deposits of $290 million or 4% quarter-over-quarter. We have been successful in achieving deposit growth while reducing our cost of deposits. Our third quarter cost of deposits has now reduced to 75 basis points, an improvement from the 80 basis points in the second quarter of 2010 and 124 basis points in the third quarter of 2009. Our net income of $47 million for the third quarter also benefit from stable credit quality. Credit indicators continue to point in a positive direction for East West. Again, for the fourth consecutive quarter, both charge-offs and provision for loan losses have declined. Provision for loan losses was $38.6 million, a decrease of $16.6 million or 30% compared in the previous quarter, and a decrease of $120.6 million or 76% from the third quarter of 2009. Total net charge-offs fell to $45.1 million, a decrease of $10.1 million or 18% from the previous quarter, and a decrease of $106.2 million or 70% from the third quarter of last year. Non-covered non-performing assets have also remained low at 96 basis points to total assets as of September 30, 2010. This quarter marks the fourth consecutive quarter again that non-performing assets have been under 100 basis points of total assets. Also, early-stage delinquencies on performing loans that are past due 30 to 89 days were $73 million or 54 basis points of total gross loans. Land and construction loans are now down to 4% of total gross loans as we continue to actively manage down these loan portfolios. Driven by the lower credit costs, growth in selective loan portfolio, and improved operating efficiency, we fully expect that core earnings will continue to improve in the coming quarters. In our earning release, we provide guidance for the fourth quarter of 2010. We currently estimated that fully diluted earnings per share for the fourth quarter of 2010 will be in the range of $0.28-$0.31 per diluted share, resulting in full year 2010 earnings per share of $0.89-$0.92. This earning per share guidance is based on the following assumption. A stable balance sheet with an increase in quarterly average earning assets to $17.9 billion. A stable interest rate environment and a net interest margin between 4% and 4.1%. Provision for loan losses of approximately $25 million-$30 million for the quarter. Non-interest expense for the fourth quarter of approximately $95 million, net of amounts to be reimbursed by the FDIC. Finally, this earning per share guidance assumes an effective tax rate of approximately 36%. Many of the actions we have taken and investments we have made over the course of the year are positively benefiting us. We expect this trend to continue in the following years as the economy improves, and we will be able to take advantage of growth opportunities that come our way. I will now turn the call over to Julia to speak in more detail about the WFIB integration and other strategic actions that East West has made recently. Thank you very much, Dominic, and good morning to everyone. On June 11, 2010, we acquired the banking operations of Washington First International Bank. Just this last weekend, and only four months since the acquisition, we successfully completed the core systems integration of Washington First International Bank. Along with the completion of the integration, we performed a thorough analysis of our banking operations in the Seattle area. We have made the decision to close one legacy WFIB branch and consolidate an existing East West branch into a nearby legacy WFIB branch. After these branch integrations, East West will operate a total of four branches in the Greater Seattle area. In addition to these changes in the Seattle area, and as part of our ongoing strategy to further improve the efficiency and profitability of our core business while creating a better customer experience, we will be making additional changes to our branch network. We have identified a number of opportunities, including a new branch location, lease negotiations, and consolidations that will optimize our branch network. In November 2010, we will open a new in-store branch located in the 99 Ranch Market in Pleasanton, Northern California. With this location, East West Bank is expanding its presence to the Tri-Valley area of the East Bay, a diverse upper middle-class region with a growing Asian population. Additionally, we have also identified opportunities to optimize our branch network with the consolidation of two Oakland branches and consolidation of two Monterey Park locations later this year in December. In addition to the changes in our branch network, we have also spent time reevaluating our resources. This evaluation has resulted in reductions in redundant staff. Prior to the acquisition of UCB in November 2009, East West had 1,314 employees. With the acquisition of UCB, we added 1,507 employees in November 2009, and with the acquisition of WFIB in June of 2010, we added 68 employees. As of September 30, 2010, total headcount for East West was 2,284, 21% less than the combined East West, UCB, and WFIB headcount level. At the same time, we are optimizing redundant functions. We are continuously making investments in associates in areas that are part of our overall strategic objectives. We feel that these targeted and strategic actions will assist in propelling us forward in 2011 and result in improved operating efficiencies and a better experience for our customers. For the third quarter, non-interest expense totaled $99.9 million, down approximately 20% for the second quarter of 2010. There were many factors contributing to the lower expenses in the third quarter. However, in summary, core non-interest expenses have declined as credit cycle costs for both legacy East West and FDIC-assisted acquisitions have decreased, and as we integrate our recent acquisitions and continue to optimize our franchise. Severance and integration-related expenses continue to decline quarter-over-quarter and are expected to substantially decline in coming quarters. In the second quarter, we incurred expenses on covered assets of about $23.9 million, of which 80%, or $19.1 million, will be reimbursed by the FDIC. This reimbursement amount is included as income in non-interest income. This compares to $7.8 million to be reimbursed by the FDIC in the third quarter. Additionally, in the second quarter, we incurred prepayment penalties for FHLB advances of $3.9 million. As you strip these items out, we incurred $92.1 million in non-interest expense in the third quarter, compared to $102.3 million in the second quarter, a $10.2 million improvement. Based on our current run rate, we anticipate that in the fourth quarter of 2010, non-interest expense will total approximately $95 million, net of any reimbursable amount from the FDIC that are shown gross up on the income statement. With that, I would now like to turn the call over to Irene, who will discuss our third quarter 2010 financial results in more depth. Thank you very much, Julia, and good morning to everyone. I would like to provide a little more insight into our financial results for the quarter. The net income for the third quarter of $47 million or $0.27 per diluted share was an improvement at $10.6 million or $0.06 from the second quarter of 2010, an improvement $115.5 million or $1.18 over a net loss in the third quarter of 2009. Our core net interest margin remained unchanged from the second quarter at 3.98% for the third quarter. Our GAAP net interest margin was 4.1% for the third quarter, compared to 4.66% in the second quarter. Included in our GAAP net interest income is discount accretion on dispositions and recoveries on covered loans. In addition, as a result of the disposition of covered loans, we recorded a net reduction in the FDIC indemnification asset and receivable of $5.5 million in the third quarter, which is reported within non-interest income on the income statement. This net reduction of $5.5 million is essentially representative of 80% of the amounts that impacted our net interest income as a result of our covered loan disposition. As such, we believe that reducing the GAAP net interest margin by this 80% or so is a better reflection of our core net interest margin of 3.98%. As we have previously indicated, early prepayments on the covered portfolios have declined in the past few months, leading to a much smaller yield adjustment in the third quarter. We expect that this trend will continue based on the activity thus far in the fourth quarter. Excluding the impact of discount accretion on covered loan dispositions, net interest income for the third quarter totaled $177.3 million, a $3.4 million increase from the second quarter, and an increase of $81.3 million from the third quarter of 2009. Dominic already went over our credit metrics, but there are a couple of points I would like to add. Non-performing assets, excluding covered assets as of September 30, 2010, included non-accrual loans totaling $179.4 million and REO assets totaling $16.9 million. Both of these figures have remained relatively stable over the last three quarters, which we view as being very positive, considering that we were at a higher level than our peers only several quarters ago. Our non-performing assets to total assets ratio, which remains under 1%, continues to be substantially better than many of our peers. During the quarter, non-performing commercial real estate loans increased by $41.2 million. This increase primarily related to two lending relationships totaling $28.4 million. At September 30, 2010, these loans were written down to the fair value of the collateral securing the loans. Further, losses in the CRE portfolio continue to be low at 1.36% of total average non-covered CRE loans on an annualized basis, and total non-performing real estate loans as a percentage of total non-covered real estate loans also remains very low at 1.74%. Overall, we feel very comfortable with the credit quality of our seasoned legacy CRE portfolio, and we do not expect a significant level of charge-offs in this portfolio in the future. Further, our CRE charge-offs, delinquencies, and non-performing asset levels are still substantially better than many of our peers. After nearly a year of experience with the UCB legacy loan, we feel very comfortable with our credit loss assumptions. Ultimately, the actual losses experienced for the individual pools we've created under the ASC 310 accounting for the UCB loan portfolio may differ from our analysis, but overall, we do not currently anticipate that any significant provision or reserve will be required for this portfolio. Further, if losses were to exceed our original estimates, they are subject to the loss share agreements with the FDIC. Within non-interest income, there are a couple of noteworthy items in the quarter. During the third quarter, we sold $177.4 million in investment securities at a gain of $2.8 million. This was primarily to reduce our overall duration risk and to also take advantage of market price volatility. Additionally, we reported gains on sale of loans of $4.2 million, largely due to the sale of $131.8 million of student loans. With the student loan sale that we had reported in the second quarter, we had also sold the buyer a call option to purchase additional loans in the third quarter. Currently, we do not have any commitments to sell any additional student loans, and we do not expect to sell any in the near future. We would like to underscore that our capital levels remain very high and continue to exceed the levels of our peers. As of the end of the third quarter of 2010, our Tier 1 leverage capital ratio totaled 10.8%, our Tier 1 risk-based capital ratio totaled 17.9%, and the total risk-based capital ratio totaled 19.7%. East West exceeds well-capitalized requirements for all regulatory guidelines by over $1 billion. As stated in the earnings announcement released yesterday, East West Bank's board of directors has declared fourth quarter dividends on common stock and Series A preferred stock. The common stock cash dividend of $0.01 is payable on or about November 24, 2010, to shareholders of record on November 10, 2010. The dividend on the Series A preferred stock of $20 per share is payable on November 1, 2010, to shareholders of record on October 15, 2010. I will now turn the call back to Dominic. Thank you, Irene. Thank you, everyone, for joining the call this morning, and 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. 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 Aaron Deer of Sandler O'Neill. Please go ahead. Everyone, and congratulations on a nice quarter. Good morning. I just wanted to talk a little bit about the loan growth that you saw. It was encouraging to see, but I was hoping to get a little color on the types of customers that were brought on, the size of the loans, where they're coming from, and maybe what the yields are on these newer loans. It really varies. We have been working on increasing our capabilities to bring in the C&I loans and deposits, and we are now much larger. The deals that we are doing, it's of a larger size than what we used to do. But it's very diverse, different type of customers that we have brought in over the last six months. Well, I think on the size of the deal, we actually are comfortable to do over $10 million, but still relatively speaking, we have very few of those loans. In fact, the vast majority of the C&I loans that we booked still are less than $1 million. We actually are encouraging our staff to try to do more deals above $1 million. But as of today, we are who we are. For years, I've always been doing these $500,000, $700,000 loans, and we've been successful doing that. As of today, we still are doing most of the loans at these $500,000, $600,000, $700,000 sizes. It's just that we are now starting to, well, I would say for the last six months or nine months or so, we are encouraging our staff to step up to maybe look into deals that are maybe above $2 million, at the $5 million, or maybe even if it's above $10 million, it's okay. But we are getting a few of them that are above $10 million. We hope we can get an average size of about $5 million. I think that would be better. But as of today, we have not gotten there yet. This will take time. As long as we continue to have decent growth of loans coming in from these less than a million dollar size, I think that we're happy to see that we actually have the business keep coming to us. And the pricing on these newer originations? I would say about prime plus half or LIBOR plus 255, around there. That is for the larger size loans. But for the smaller loan side, we get a little bit better pricing. Okay. Then you gave some guidance for next quarter on the expense front. I am wondering, given some of the cost saves from the branch consolidations and the personnel reductions and additions that are being made, is that kind of $95 million run rate likely to drop as we head into 2011? Or what are the thoughts on that front? No, we will be reinvesting and we will be hiring more people to increase our C&I platform capabilities and other initiatives. I would say that it would not go down, but we hope that it will increase, but get offset by the increase in revenues. I would say that it would be difficult for us to continue to reduce the dollar amount of that non-interest expenses. Okay. Thanks for taking my call. Thank you. The next question comes from Joe Morford of RBC. Please go ahead. Thanks. Good morning, everyone. Good morning. I guess, first just a quick follow-up on Aaron Deer's question. Any trends geographically in terms of the growth? Is it mostly Southern California, or is it coming throughout the footprint? California. Okay. Obviously, because that's the area that we have the largest number of branches and also lending officers, we are booking more business in the California area. But in 2011, we will have the time to explore the growth opportunity in some of the other states and also the Greater China region. Okay. Mostly wanted to ask, I guess, if you could talk a little bit about the 40% growth in the investment portfolio, at least on an end of period basis. Just tell us a bit more about what you're buying there, and did the duration of the portfolio change much and things like that. Mostly short-term, about two years, between two to three years. We invested some of the very lowest, the money market account, to a two to three year. So the yields, it's very stable compared to the second quarter, about 2.4%-2.5% yield. So it's just an increase in cash that we got from the deposits plus investing the cash into investment securities. But we try to be very careful with the duration risk, knowing the interest rates are very low. So our duration overall is pretty short. Okay, so these are mostly just agencies you're buying? Yes. Mostly agencies. Okay. Lastly, just as we think about 2011, and as your loan growth begins to, you start to see greater loan growth, should we expect overall earning assets to grow as well, or is it mostly going to just be a remix of these cash and securities into these higher yielding loans? I would say that the total earnings assets may not grow that much, Joe. It's more the remix like Steve said. Unless we have a major growth in the deposits, it's just a remix because we are very liquid right now, so we will just be investing our investments into loans. Okay. Yeah. Great. Thank you all very much. Thank you. The next question comes from Ken Zerbe of Morgan Stanley. Please go ahead. Great, thanks. I guess on your expense guidance a little bit, obviously had a huge amount of improvement from lower OREO costs this quarter, and I understand that a large part of that is covered by the FDIC guarantee. But what gives you the confidence that OREO costs could actually remain low going forward, sort of on a net basis to you? Because that does seem to be at least a partial driver of the lower expense run rate. I think it might have some fluctuations, Ken, but we think that we took care of some of the more problematic OREOs in the second quarter. But you are right, we cannot predict with certainty from quarter to quarter, there will be some fluctuation. But the good thing is that our net is only 20% of those expenses. Yeah. Right. Yeah. Just one more comment, Ken. With the acquisition of UCB in November, when we look back and looked at it, a lot of the OREOs, it flushed through in the second quarter. So the new movement into OREO, it has come down. Those are also indications that give us a little bit more color as to what will happen in the future. Okay. No, that helps. The other question I had, just in terms of loan growth, specifically, it looks like you have the ongoing reduction in commercial real estate, and I understand you want to reduce your exposure there, increase in C&I. But when you think about the, and this is excluding the covered loans, but when you think about the net of sort of the lower CRE and higher C&I, how do you think about loan balances over the next couple of years? I think, unless we really grow in the C&I big time, chances are the total loan balance will stay fairly stable. But it's a mix of the loans, just like we said earlier, that the interest earning assets probably will stay stable with reinvesting the liquidity from investments to loans. Yeah, it's more like changing the mix of our loan portfolio so that we'll have a much more diversified loan portfolio going forward in the next few years, rather than a little bit too much of a real estate concentration. On one hand, we're very comfortable with our CRE portfolio, and I think that history have shown so far that we have much lower delinquency and charge-off than other peers. But on the other hand, having the ability to diversify now, particularly now, because many of our peers really are not in position to make too many loans. Therefore, this is a good time for us to take market shares. We do what we need to do on the consumer side, on the C&I side, but also from a commercial real estate, we are not shy away from originating some more. We're just not taking a very aggressive approach to try to actively market in that arena. So our investment in terms of human resources have been put into international trade finance and C&I. Therefore, what I think most likely is going to happen is this gradual change of mix. Because just because we're very aggressive in trying to recruit additional human resources in international trade finance and C&I, these loans are harder to grow. The size of the loans, relatively speaking, compared to commercial real estate, are a little bit smaller, and the time to cultivate relationship takes a little bit longer. So that combination will result in us not growing as rapidly from that one end. So all together, I think it will be just a push. On the margin, are the new C&I loans more profitable to you than a marginal new CRE loan at this point? Not from a loan yield point of view, but I think that in the totality of the balance sheet. But when you look at on the C&I side, oftentimes we get pretty decent fee income from the cash management area. Many of them, we get potentially foreign exchange fee income. It's the other stuff that all combined together, we have to look at both loan deposits, fee income, all combined. Yeah, that's what I meant, on an all-in basis, including the non- Yeah, on an all-in basis, I think it's quite frankly, a little bit better because also if we originate one C&I loans and we keep that C&I customer happy and making sure that they continue to be profitable and get a little bit bigger, we can sit on an account year in, year out and get bigger and bigger and make more money, which is a little bit different than commercial real estate loans. You start off with the biggest balance, and then you start amortizing it down to a lower level. Then in five years, then you know that you have to take a risk of a refinance potentially from competitors. So, in that regard, I think that all in all, it's a little bit more profitable. It's a little bit harder to get, but it's a little bit more profitable. All right, great. Thank you. The next question comes from Joe Gladue of B. Riley. Please go ahead. Yeah, good morning. Wanted to talk about, I guess, get a little into detail on the net charge-offs. I guess, considerable change in the makeup of net charge-offs this quarter. And of course, I realize that the declines in commercial and commercial real estate or commercial construction, they're fairly lumpy. The single-family real estate showed a big jump from the second quarter to the third quarter. Was that one or just a couple of real large loans or just what was driving that? Joe, this is Irene. During the quarter, we did do some sales of single-family loans, which is why you saw the increase from last quarter. Okay. And I guess the other question. Go ahead. Okay. Just wanted to talk about capital, just update on TARP and also on any other thoughts of you are building up your capital and just wondering if there's any thoughts on what to do in terms of dividends or repurchases or any other thoughts on utilizing the capital anytime soon. Well, we want to do things one step at a time. As we discussed before, our plan is to pay back TARP in the fourth quarter. In fact, last quarter earnings release, we reported to you that we will be talking to the regulators. We have already talked to the regulators. We are in the process of just basically waiting for the. The regulators are very busy right now with all these problem banks out there. We do understand that these things that are, well, frankly, not as urgent as looking at helping these other problem banks to deal with their issues. So take a look at maybe longer period of time. But we started the conversation. We are very comfortable. That conversation goes really well, and it is just a matter of time that we hopefully Our expectation is that in the fourth quarter, we still plan to pay back TARP in full. Once we get that behind us, then we can look at any other issues. We have active management here. They are actively managing the balance sheet liquidity, and of course, capital is also something that we will be actively managed going forward. Our approach has always been do one thing at a time. At this moment, the most important thing we need to focus on is to get TARP paid off, hopefully before the end of the fourth quarter. Okay, thank you. That is all I had. Thank you. The next question comes from Julianna Balicka of Keefe, Bruyette & Woods. Please go ahead. Good morning. Good morning. I have a couple quick questions. Some of the loans that you picked up this quarter in the student loan area, do you have any more information as to who you were able to pick up the loans from? Julianna, we buy the student loans from a variety of sources. All of these are federal guarantees. These are guaranteed student loans. We bought it from different places. Then, you talked at length about the improvements in efficiency and optimization. Are there any efficiency ratio targets you are aiming for or anything along those lines? Right now, it is high 40s, maybe it will stay around there, 48% area. Very good. Good to see the quarter. Thank you very much for taking my questions. Thank you. The next question comes from Lana Chan of BMO Capital Markets. Please go ahead. Hi, good morning. Good morning, Lana. I had two questions. One, on the increase in commercial real estate non-performance this quarter. Could you give us a little bit more color around that? Was that a couple of smaller credits, one larger one? And what are you seeing with the recent appraisals on the problem CRE? The increase in the CRE non-performing for the quarter was a result of two relationships. It was about $28 million, was the result of these two relationships. I think the relationships were a little bit bigger, and then also the credits were a little bit larger than our normal CRE loans, which as you know, are about $1.2 million in size. I think sometimes it can be a little lumpy there. We have taken the charges that are necessary to bring that down to fair value as of 9/30. What was the charge that you took? It was a few million. Okay. My second question was, with the strong deposit growth this quarter, clearly your liquidity is improving. Can you talk about any opportunities to pay down further some of the higher cost borrowings, particularly some of the structured repos? No, because there's a prepayment penalty on those structured repos and the FHLB advances. It doesn't make sense because the yield, the interest rates are so low for the long term. The prepayment penalty is pretty steep. That doesn't seem to make sense to pay it off at this time. Okay. Thanks, Julia. Yeah. Thanks, Lana. The next question comes from Jennifer Demba of Robinson Humphrey. Please go ahead. Thank you. I just wanted to get a sense of what you're seeing in terms of acquisition possibilities, and if you're seeing any acceleration in opportunities. Not really. Well, because there are a lot of opportunities, as obviously, banks that are safe and sound constantly get opportunities coming from FDIC. However, our approach is that we want to be more strategic. We want to make sure that the banks that we are acquiring are something that we can actually add more to the franchise value instead of just a bunch of mismatch that cause management to get distracted into just doing a bunch of integration and things like that may not necessarily be beneficial for the long-term future. We feel very strongly that United Commercial Bank acquisition, the big one, and the little one, Washington First International Bank, both of them strategically make a lot of sense for us. If we see more of these kind of deals coming in, the good news for us is that we're very good at doing these type of deals. When it comes down to integration, taking care of all these operational issue, we have always been pretty good at executing deals like that. So if there are more of these deals coming, we have all the capacity to work on it, and we have no doubt we'll jump into it if they are strategically valuable for us. However, while I say that we're very comfortable to do acquisitions, we don't need to do any acquisitions. Therefore, our position is that we will just be very strategic and wait to see what's out there. If there is something good out there, we have the capacity and be ready to go, both from a capital point of view and also from a human point of view. But on the other hand, we want to be a little bit more choosy because the nice part about not jumping into any kind of acquisition is that we will be able to really focusing on taking good care of customers and building a better C&I platform and better managing our international Greater China platform, when we have a little bit more time internally to deal with those issues. So while there's a great benefit when we make a great deal, the downside of making a great deal is that to a certain degree, this organic growth initiative suffers because we have to put it in a back burner. It's nice for me to. I just came back from China last week. It's nice to be able to go back there and not worry about getting over some other places Friday night to meet with the FDIC to close a branch down. Those are kind of things that it's a balance, it's a trade-off. But we will make the best decision at the moment when we see something's available. Okay. Thank you. Thank you. The next question comes from Ram Shankar of FBR. Please go ahead. Good morning. Thanks for taking my question. Congratulations on the quarter. Thank you. Just a follow-up to a few of the questions earlier. Just assuming the same trajectory in your earning asset mix and the new pricing that you're seeing on loans today, would it be fair to say that your fourth quarter core NIM guidance is probably the peak until rates move up substantially? No, some, like the variation between 4% to 4.10% has a lot to do with the accretion that can be a bit higher, depending on the payoffs and also the prepayment speed assumptions. So there will be a few million-dollar adjustments on that. So we feel that, like it is either stable or slightly higher. Okay. Do you have any more juice left on the funding side, maybe to improve NIM? Is that a possibility? Not that much. Okay. Yeah. The NIM outlook, you said you would repay TARP in fourth quarter. Is there any actions that you anticipate taking there that might affect your NIM outlook? Do you have to issue any senior debt or any other instruments out there? No. We have enough cash, and we anticipate that we do not need to issue more capital or some other debt that will be very costly for us. Okay. Just one more question, if I may. Maybe you could just help me understand the dynamics in the non-accrual loans. For instance, last quarter, you had about $23 million in early-stage delinquencies in the resi construction book. Yet this quarter, you have none, and the 90-day delinquencies are only $2 million or so. So what happens to these credits? Do they just get resolved, or are they restructured? Yeah. The last one is a residential construction that was completed as of June 30. There have not been any sale. So even though it was delinquent, we put it as forced non-accrual. But since then, the loan has been paid down, and the value is there through the sales of this unit. So we feel very comfortable that the notes will be paid off. That loan has gone down from $22 million to $14 million in a matter of three months. Okay, thanks. Congratulations again. Thank you. The next question comes from Chris Stolton of Howe Barnes. Please go ahead. Thank you. Just one or two questions. What are you seeing regarding cap rates or cash flows related to income-producing properties? Do you see them declining, stabilizing, or improving within your different markets? I think for multi-family, the cap rate definitely declined. I think that the commercial real estate, it really varies based upon the type of property and the region. But most people said that multi-family, there have been a decline in the cap rates for multi-family. Okay. All right. What was your TDR balance for the quarter? As of 9/30, it was about $80 million. Eight-eight? $88 million, yeah. It is an increase from June 30. The increase really had to do with a couple of construction projects that we had where we renewed them. The fortunate thing is that subsequent to the renewals, there is paydown activity. The units are selling. We hope to see that that balance continues to decline. Okay, thanks. One additional question. Just so I'm crystal clear here, your guidance for your NIM is between 4% and 4.1%. Is that core, or is that adjusted NIM that includes the gain from the covered loans? It's a core NIM. If you want to calculate the net interest income, we are projecting the interest earning assets of $17.9 billion, times 4% or 4.10. We are projecting a net interest income of $179 million-$182 million compared to $177 million this quarter. That's quite comparable to this quarter. Yes, that's it. Thank you very much. Thank you. The next question comes from Mike Zaremski of Credit Suisse. Please go ahead. Hi. Thanks for taking my question. Hi, Mike. In terms of the covered loan portfolio, how should we think about the pace of runoff in the coming quarters, and how much construction is left in that overall portfolio? I think construction is about $1 billion on the portfolio. We think that the pay-down will be very similar in the next few quarters. It subsided dramatically last quarter, and we expect to be relatively the same in the next few quarters. Okay. Just to confirm, I think you said this earlier. So in terms of the past costs, in terms of downward repricing, is there any room left for that, and how much brokered CDs are in there? Not much. We expect the cost of funds, the cost of deposits to stabilize in the next couple of quarters, too. Okay. Thank you for taking my questions. Thank you, Mike. Once again, if you'd like to ask a question, press star then one on a touch-tone phone. Again, if you have a question, please press star then one. This concludes our question and answer session. I would like to turn the conference back over to Dominic Ng, Chairman and CEO, for any closing remarks. Thank you. Since there are no more questions, we are looking forward to talk to you again at the fourth quarter earnings release. Thank you. Bye-bye.