East West Bancorp, Inc. (EWBC) Q1 2012 Earnings Report, Transcript and Summary

Kelly Adams - Dominic Ng - Chairman of the Board, Chief Executive Officer, Member of Executive Committee, Chairman of East West Bank and Chief Executive Officer of East West Bank Julia Gouw - Vice Chairman, President, Chief Operating Officer, Member of Executive Committee, Vice Chairman of East West Bank, President of East West Bank and Chief Operating Officer of East West Bank Irene H. Oh - Chief Financial Officer, Principal Accounting Officer, Executive Vice President, Chief Financial Officer of the Bank and Executive Vice President of the Bank

Ken A. Zerbe - Morgan Stanley, Research Division David Rochester - Deutsche Bank AG, Research Division Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division Herman Chan - Wells Fargo Securities, LLC, Research Division Jonathan Elmi - Macquarie Research Joseph Gladue - B. Riley & Co., LLC, Research Division Joe Morford - RBC Capital Markets, LLC, Research Division Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division Gary P. Tenner - D.A. Davidson & Co., Research Division

Good morning, and welcome to the East West Bancorp First Quarter 2012 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Kelly Adams. Please go ahead.

Good morning, and thank you for joining us to review the financial results of East West Bancorp for the first quarter of 2012. Here to review the results are Dominic Ng, Chairman and Chief Executive Officer; Julia Gouw, President and Chief Operating Officer; and Irene Oh, Executive Vice President and Chief Financial Officer. We will then open the call to questions. First, we would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For a more detailed description of factors that affect the company’s operating results, please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2011. Today's call is also being recorded and will be available in replay format at eastwestbank.com and streetevents.com. I will now turn the call over to Dominic.

Thank you, Kelly. Good morning and thank you, all, for joining us for our earnings call. Yesterday afternoon, we were pleased to report financial results for the first quarter of 2012. East West reported strong earnings of $68 million or $0.45 per diluted share for the first quarter of 2012. As compared to the prior year, East West grew earnings by $12 million or 21% and increased earnings per share by $0.06 or 22%. East West demonstrated operating performance across a number of key areas in the first quarter. Our return on assets improved to 1.26% and our return on equity improved to 12.01%. Our net interest margin is strong. Noninterest income is up. Cost of deposit is down. Credit costs are down. And noninterest expense remains stable. By focusing on attracting and retaining sustainable and profitable clients while maintaining high credit quality and interest rate risk management, we selectively and purposely grew our long and deposit portfolios during the first quarter of 2012. We grew our noncovered loans by $212 million or 2% and increased core deposit by $256 million or 2% to a record $10.6 billion. This increase in our loan portfolio was primarily driven by growth in our single-family residential and commercial and trade finance portfolio, which grew to $2 billion and $3.2 billion, respectively, as of March 31, 2012. Additionally, growth in core deposit was fueled by a 6% increase in the demand deposits to a record $3.6 billion as of quarter end. Our strong results again demonstrated the core strength of our organization and our ability to perform well regardless of the economic conditions. East West is outperforming many of its peers in overall profitability and our ability to win new business, increase top line revenue and maintained strong expense control. These successes are in part due to prudent decisions and actions we have taken in the past to build a strong foundation for our organization. The same thing, East West is currently taking actions and making investments to ensure future growth opportunities for many years to come. As in the past, in our earnings release, we provided guidance with second quarter of 2012 and the full year. We currently estimate a fully diluted earnings per share for the full year will range from $1.78 to $1.82 per diluted share, or an increase of 11% to 14% from $1.60 per diluted share last year. Also, we currently estimate that fully diluted earning per share for the second quarter will range from $0.43 to $0.45 per diluted share. This earnings per share guidance for the second quarter is based on the following assumptions: A stable balance sheet; a stable interest rate environment; and an adjusted net interest margin of approximately 3.9% to 4%. Provision for loan losses of approximately $15 million to $20 million for the quarter. Total noninterest expense of approximately $100 million for the quarter, net of amounts to be reimbursed by the FDIC. And finally, an effective tax rate of approximately 36%. In summary, we are pleased with our operating performance in the first quarter, and believe that our strong results will serve as a solid foundation for the remainder of the year. We are continuing to grow our balance sheet prudently, make necessary adjustments, investments, return capital of shareholders and grow profitability. At this point, we believe we are well on our way to record earnings for the full year of 2012. With that, I will now turn the call over to Julia to speak in more detail about our key successes in the first quarter.

Thank you very much, Dominic, and good morning to everyone. During the first quarter of 2012, we focus on prudently growing our loan and deposit portfolios, appropriately balancing growth, interest rate and credit risk and also executing on our strategy to focus on bringing long-term, profitable relationships. As of March 31, 2012, total loans equaled $14.5 billion, unchanged from the fourth quarter of 2011. However, noncovered loan balances increased 2% or $212 million during the first quarter to $10.8 billion at March 31, 2012, while covered loans decreased $239 million or 6% from December 31, 2011, to $3.7 billion as of March 31, 2012. The growth in our noncovered portfolio for the first quarter of 2012 was driven by strong growth in commercial and trade finance loans and single-family mortgage loans, which I will discuss in more detail. Non-covered commercial and trade finance loans increased $96 million or 3% to $3.2 billion. Combined, total non-covered and covered commercial and trade finance loans increased to $3.9 billion at March 31, 2012, now equal 27% of our total gross loan portfolio. As we have mentioned before, our long-term goal is to have commercial loan portfolio equal 1/3 of our total loans. This growth in the commercial and trade finance portfolio has been achieved while maintaining strong credit quality and strict underwriting criteria, and we are pleased with the progress we have made towards our goal. In addition to the growth in our commercial and trade finance loan portfolios, we also continue to experience strong market demand for single-family loans. Our single-family loan portfolio grew $157 million or 9% quarter-to-date to $2 billion at March 31, 2012. These single-family loan originations have largely stemmed from our retail branch network. As mentioned before, our underwriting criteria for single-family loans is very high, and we require very high down payments and low loan-to-value ratio requirements. On the average, the loan-to-value of the loans we originated in the first quarter was 56%. Historically, the credit quality for our single-family loans as an outstanding regardless of real estate cycles, and the attributes this largely to the high down payment requirements we underwrite to. Moving onto asset quality, we are pleased to see that asset quality metrics improved in the first quarter of 2012. For the first quarter of 2012, net charge-offs decreased significantly, and nonperforming assets declined as well. Total net charge-offs decreased to $10 million for the first quarter of 2012, a decrease of 53% or $12 million from the previous quarter and a decrease of 70% or $24 million compared to the first quarter of 2011. Gross charge-offs totaled $17 million, and recoveries totaled $7 million for the first quarter of 2012. Included in the recoveries for the first quarter of 2012 are $3 million of recoveries on construction and land loans and $3 million of recoveries on commercial loans. Additionally, nonaccrual loans, excluding covered loans, decreased to $121 million as of March 31, 2012. The total nonperforming assets, excluding covered assets to total assets ratio, was under 1% for the 10th consecutive quarter, with nonperforming assets down to $170 million -- $167 million, I'm sorry, or 77 basis points of total assets at March 31, 2012. The provision for loan losses was $18 million for the first quarter of 2012, a decrease of 10% or $2 million from the prior quarter and a decrease of 32% or $8 million as compared to the first quarter of 2011. Due to the improvement in credit quality that we have experienced, our provision for loan losses has declined each quarter for the past 2 years. However, East West continues to maintain a strong allowance for loan losses for the non-covered loan losses of $214 million or 2.04% of non-covered loan receivable at March 31, 2012. This allowance, as of March 31, 2012, represents an increase in the dollar balance as compared to December 31, 2011, and no change in the allowance to total loans ratio. Overall, we expect credit quality to continue to improve and estimate that the provision for loan losses will be $15 million to $20 million for the second quarter of 2012. In addition to our focus on prudently growing our loan portfolio, we have also continued our focus on growing low-cost core deposits while simultaneously reducing our reliance on time deposits and improving our cost of deposits. Core deposits increased to a record $10.6 billion at March 31, 2012, or an increase of 2% or $256 million from December 31, 2011. Within core deposits, we experienced the largest increases in non-interest-bearing demand deposits and savings account which increased 6% or $197 million to $3.7 billion and $73 million or 6% to $1.2 billion, respectively. Core deposits now equal 61% of total deposits, and noninterest bearing demand deposits now equaled 21% of total deposits as of March 31, 2012. As we continue to build our commercial banking platform, we will continue our focus on retaining the core deposit accounts related to these new commercial and trade finance loans. Lastly, I would like to talk briefly about the status of our recent capital management actions. As we first announced last quarter and as a direct result of the strength of our core earnings, balance sheet and capital levels, the board of directors authorized an increase in our dividend rate to $0.10 per quarter and to repurchase up to $200 million of our common stock. Through the end of the first quarter of 2012, we have bought back 4.6 million shares at an average price of 22.14% -- $22.14 per share, or approximately 50% of the amount authorized under our repurchase program. We expect to buy back the balance of the authorized amount during the remaining part of 2012. As our market share grows, our franchise becomes stronger, and our earnings power increases, I'm confident, we'll continue to demonstrate strong financial performance and provide strong value to our shareholders. With that, I would now like to turn the call over to Irene to discuss our first quarter 2012 financial results in more depth.

Thank you, Julia, and good morning to everyone. I'd like to discuss the financial results for the first quarter of 2012 in more detail. Specifically, actions and fluctuations that impacted our net interest margin, noninterest income and noninterest expense. First quarter earnings totaled $68.1 million, an increase of $1.9 million or 3% from the fourth quarter of 2011, and an increase of $12 million or 21% from the first quarter of 2011. For the first quarter of 2012, we reported an adjusted net interest margin of 4.21%. This is an improvement of 8 basis points from the fourth quarter 2011 adjusted net interest margin of 4.13%, and an improvement of 27 basis points from the first quarter 2011 adjusted net interest margin of 3.94%. Overall, our improvement in the net interest margin from the prior quarter and the prior year was primarily due to a decrease in our cost of funds while we maintained a relatively stable level of interest income. Excluding the net impact of covered loan dispositions, our yield on interest-bearing assets totaled 4.93 for the first quarter of 2012, unchanged from the fourth quarter of 2011. However during the first quarter of 2012, total adjusted net interest income decreased $4.5 million from the fourth quarter to $39.3 million due to a decline in total interest-bearing assets of $93.5 million. Our non-covered loan yield remained relatively stable at 4.73% for the first quarter of 2012 as compared to 4.76% for the fourth quarter of 2011, while our covered loan yield, net of covered loan dispositions, increased from 8.26% for the fourth quarter of 2011 to 8.42% for the first quarter of 2012. Total interest income, adjusted for the net impact of covered loan dispositions, decreased $4.5 million. Interest expense also decreased by $4.7 million or 12% from the prior quarter to $35.1 million for the first quarter of 2012, resulting in a net increase to adjusted net interest income of $173,000. The cost of funds decreased 8 basis points from 83 basis points in the fourth quarter of 2011 to 75 basis points in the first quarter of 2012. The improvement in the interest expense and the cost of funds during the first quarter is primarily due to management's proactive reduction of high-cost time deposits and to the strong growth we experienced in demand deposits. For the past 2 quarters, a significant portion of time deposits matured and as a result, the company was able to reduce both the balance of time deposits and the average cost of time deposits during the first quarter. Time deposits decreased by $370.7 million or 5% from year-end to $6.8 billion at March 31, 2012. The average cost of time deposits decreased from 1.01% in the fourth quarter of 2011 to 88 basis points in the first quarter of 2012. Looking forward towards the remainder of 2012, we do see additional opportunity to reduce the cost of deposits, as additional time deposits come up from maturity. However, the dollar amount of time deposits that will be maturing in the coming quarters is lower than what we experienced in the past 2 quarters. As such, we do not expect the same level of decrease in our cost of deposits in the future quarters of 2012, as we've experienced in these last 2 quarters. In addition, the decrease in total interest expense in the first quarter of 2012 also stemmed from the prepayment of $20 million in restructuring of $300 million of Federal Home Loan Bank advances and $200 million of securities sold under long-term repurchase agreements. The effective interest rate on these restructured advances declined from 2.27% to 1.36%. As such, the weighted average effective rate of all FHLB advances at March 31, 2012, declined to 1.65% from 2.31% as of year end. Also, the company reduced the weight on $200 million of restructured long-term repurchase agreements at 86 basis points during the quarter. These actions served to improve our net interest margin in the current quarter, and will also serve to improve it in the future quarters. In terms of our expectation for future quarters, we are comfortable that we'll be able to maintain a relatively stable net interest margin. Although, low yields on the non-covered portfolio are expected to decrease as long interest rates remain low and there is a certain amount of volatility in the accretion income from the covered loan portfolio, we are confident that overall, we can maintain a net interest margin to approximate 3.90% to 4% for the remainder of 2012. Moving on to noninterest income and expense. East West reported total noninterest income for the first quarter of 2012 of $21.7 million, an increase from $937,000 of noninterest income in the fourth quarter of 2011 and $11 million of noninterest income in the first quarter of 2011. The increase in noninterest income from the prior-quarter and prior-year quarter is primarily attributable to a decrease in a net reduction of the FDIC indemnification asset and FDIC receivable. Branch fees, letter of credit and FX income, loan fees and other operating income also increased and totaled $21.6 million in the first quarter of 2012 as compared to $17.2 million in the fourth quarter of 2011 and $19 million in the first quarter of 2011. In addition, included in noninterest income for the first quarter were gains on sales of student loans of $4.5 million, gains on sales of SBA loans of $929,000 and gains on sales of investment securities of $483,000. Noninterest expense, excluding the amounts to be reimbursed by the FDIC and prepayment penalties on FHLB advances, totaled $101.3 million for the first quarter of 2012. Our efficiency ratio remains stable at 44.1% for the first quarter compared to 43.8% for the fourth quarter 2011 and 43.1% for the first quarter of 2011. Excluding amounts to be reimbursed by the FDIC, noninterest expense increased $3.2 million or 3% for the first -- fourth quarter of 2011. The increase in noninterest expense was primarily due to an increase in compensation and employee benefits. Compensation expense increased $5.3 million from the fourth quarter of 2011 to $46.4 million for the first quarter of 2012. This increase was caused by an increase in payroll taxes and due to a reduction in deferred loan costs during the first quarter. As a result of the reduction and loan origination volume in the first quarter of 2012, deferred loan costs decreased, which resulted in an increase in compensation during the quarter. Additionally, legal expense totaled $7.2 million for the first quarter, an increase of $2.8 million from the fourth quarter of 2011. The increase in legal expense was primarily due to covered assets, and net of the 80% reimbursable portion from the FDIC of $4.4 million, which is included as part of noninterest income. Legal expense actually declined by $801,000 or 23% quarter-over-quarter. Lastly, during the first quarter of 2012, the company prepaid $20 million of FHLB advances, incurring a prepayment penalty of $1.3 million, which is included in noninterest expense. We will continue to make additional investments in the future to support our growth. We will also look for opportunities to optimize our operations and increase efficiency. As such, we expect that noninterest expense will continue to remain low and forecast that it will approximate $100 million for the second quarter of 2012, net of amounts that are reimbursable by the FDIC. Finally, as stated in the earnings announcement released yesterday, East West's Board of Directors have declared second quarter dividend on the common stock and Series A Preferred Stock. The common stock cash dividend of $0.10 per share is payable on or about May 24, 2012, to shareholders of record on May 10, 2012. The dividend on the Series A Preferred Stock of $20 per share is payable on May 1, 2012, to shareholders of record on April 15, 2012. I'll now turn the call back to Dominic.

Thank you, Irene. Thank you, everyone, for joining the call this morning. I would now open the call to questions.

[Operator Instructions] Our first question is from Ken Zerbe, Morgan Stanley.

I just have 2 questions. The first one, what would change your views on the timing or the amount of buybacks that you expect to do this year? Because the reason I ask because your guidance is based on the flat balance sheet and I understand that the risk weighting goes up given UCB. But it still seems you're being fairly conservative especially after you did, I guess, half of your buybacks in one quarter.

Ken, this is Julia. Well, we're expecting to complete this year, so probably $5 million to $8 million for the second quarter and another $50 million in the third quarter.

Okay. And then, I assume you'd go back and re-up it from there?

After that, we'll take a look in January. What we plan to do is like a possibility increasing the dividend and then announcing our mobile bank if it's -- if it makes sense at that time.

Okay. And then the other question I had, C&I growth looks like it slowed a fair bit this quarter. When you look at over the rest of this year, do you think the growth rate could remain at these lower levels or is there a reason to think it might pick up again?

We think that the C&I loan growth of probably about $100 million per quarter is a doable number. And last year, we had stronger growth for different reasons, the cross-border loan guarantee and so the growth decrease compared to the third quarter, fourth quarter of last year to $90-something million this quarter. But we think $100 million increase each quarter for the remaining of the year is quite doable.

Our next question is from Dave Rochester, Deutsche Bank.

Can you just update us on where the spreads on C&I and CRE were doing in the quarter, and then you changed in the competitive landscape and either in those arenas? I just heard some chatter that Wells Fargo was getting addressed on CRE rates and terms, and I'm just wondering if you are continuing to see that.

Yes, we have seen a lot more competitive rates coming from other banks. And specifically as you mentioned, Wells Fargo is being one, and then there are other banks also are trying to add more CRE loans and have dramatically reduced the rate. And we're seeing that coming. And that's the reason why we are expecting our non-covered loans yield to possibly come down a little and during the year because obviously, we are looking at some of these CRE loans that maybe looking for refinanced opportunity for -- from some of the other banks to offer a much lower rate. And so -- but we are doing fine with growing our C&I loans, and we have plenty of relationship banking type of clients that are not just going out, just shopping for rate differences. So all in all, I think that, that's the reason we expected our loan yield to may come down a little. On the other hand, we have a pretty strong cost of deposits in terms of the -- cost of deposit rates are doing fine, very well for us to help us to continue get the margins remain stable.

And on the resi side, are you still seeing that 5% level on the ARM product that you're producing? I think those were current customers, more like at low doc type loans or are you still getting those kinds of yields?

Yes, in the average yield is about 5% -- most of these are 5-year fixed, and then become adjustable. So we -- our niche is to have low doc but very low loan-to-value and for a lot of these, these are relationship customers that come from our retail branch network where they value the fact that we can close the loans timely. We offer mostly purchases as opposed to refinance loans. So as a result, timing is very important for them. They want to make sure that they get a loan from a bank that can close the loan timely. You heard that there are a lot of the big banks that they cannot close the loans quickly. So as a result, some of these escrow -- they fail to close the escrow on the due date.

Yes. And how are you thinking about that growth going forward? Should we see this growth persist into the second quarter with the prevailing activity in the marketplace and given what you're seeing in your customer base?

We think that it probably will slow down to about $100 million a quarter. Again, we only do purchases. So as a result, we would -- will see less new funding compared to...

Okay. So maybe a little bit less growth in 2Q versus 1Q and getting down to 100 at some point as a run rate?

Yes, yes.

Yes. We do refi also. The only thing is that we are substantially more competitive in the purchase arena, simply because what we can close along within 30 days, which the real key for buyers in the home market, if any buyer say that either they do all cash or they can say that I can close this transaction within 30 days. And that will make the buyer become a very compelling, attractive buyer to the seller. So -- and since we can always close loans in such an expedience manner, particularly compared with all the banks out there who takes sometime 2, 3, 4 months to close a loan transaction. So therefore, I think that we naturally attract most of the, sort of, home purchasers. And for the refinance people who can take their time to refinance, obviously, our rate will not be as competitive as the large banks out there. So I mean, it's -- so naturally it just fallout that way. But within the purchase market, because of our requirement for substantially higher down payment, so we naturally attract customers that are willing to put in these 40%-plus type of down payment and then they end up coming to us.

And also, Dave, we track the delinquency and the losses from the low LTV loans is very, very minor. As of now, if you look at our nonaccrual loans, it's only $3 million out of $2 billion portfolio. That's seen like less than 20 basis points of delinquencies on our single-family loans. And that's attributed to the low LTV.

Okay, great. One last one real quick. On the margin side, I think, Irene, you had mentioned smaller amount of CDs repricing going forward versus what we've seen in the last couple of quarters. Do you even have the dollar amount for 2Q and the rate that's rolling off?

Sure. So, Dave, just as a reminder, last quarter, or the quarter before, we have got $2.6 billion at 85, 86 basis points that was maturing in each quarter. This quarter when we look at second Q, third Q, fourth quarter, it's much lower. Second quarter, we have about $1 billion at about roughly 80 basis points or so, so much lower than in the past. And then each quarter after that, it comes down.

Our next question is from Aaron Deer, Sandler O'Neill partners. Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division: I have a quick question or a couple of them I guess on the margin. First, with respect to the guidance on the core margin of 3.90% to 4%, that seems down pretty sharply from the 4.21% that you had in the first quarter. Notwithstanding some of the asset yield pressures. Here's what's causing that sharp drop or if there was some outsized interest income in the first quarter.

Sure, Aaron, this is Irene. The guidance that we give out obviously, with the volatility on the accounting for the covered loan to SOP accounting, there is a certain amount of -- we don't know exactly where it would be quite frankly. Like this quarter, the amount of the net accretable income was about $17 million, which is higher than what we forecast, which is $15 million. So when we talk about the 3.90% to 4%, I think probably a better way to look at it is that 3.90% is a little bit of more of a floor of where we think our margin would be given these various factors and the fact that there's some volatility with the SOP income and then also that we know that our repricing downwards of the CDs. It's not going to be as much in the second quarter or in the future as well. So the offset to the reduction in the loan yield, there won't be as much. Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division: Okay. But the 3.90% to 4%, that's your core margin expectation excluding accretion income, correct?

Yes. Excluding the impact of the FDIC indemnification asset, so the core margin. But there is still additional accretable income that comes through from the covered portfolio. So some of that is what I'm talking about. It's a little volatile. Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division: And then at the end of the year, I think you put the net accretable yield remaining at around $161 million. Where does that stand at March 31?

As of March 31, it was $142 million.

Next question is from Brett Rabatin, Sterne Agee. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: Wanted to ask from a loan sale perspective, can you guys walk through what you -- what products you sold during the quarter, and then just the expectations for sales in the next few quarters and what your plans are there?

Sure, Brett. This is Irene. Most of the loans that we sold during the first quarter were -- are government-guaranteed student loans. That was a large reason for the gain. We also did sell some SBA loans, the 7A program as well, that was about $1 billion of the gain as well. So we are originating SBA loans on a regular basis and those -- it's very attractive to sell those in the market, so 8, 9 points or so. So those we'll continue to originate and sell. The student loans is something where we are purchasing in the market and once we're kind of accumulating a certain size, we're selling those as well. So in the future, probably we will continue to have both of these sales of the SBA loans and the student loans. Over time, the student loan sales would diminish, though. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: Okay. And then secondly, just wanted to ask from a runoff of the covered portfolio perspective, as that continues to occur and you're obviously in a position of sell at profitability, but you've got to replace that covered asset. Can you talk about the strategy longer term and what you want to do with the franchise, maybe Dominic, as it relates to growing it as opposed to you're going to obviously, having high profitability and be buying back stock in the near term. You've been reticent in wanting to do acquisitions, but I'm just curious on your longer-term view on planning and strategy.

Well, I think on the -- specifically related to the covered loans, yes, the covered loans we'll continue to pare down gradually. And in the meantime, we are converting some of these covered loans to non-covered. Obviously, many of the covered loans are United Commercial Bank clients, and we have every reason to keep and retain. So what you will see is that gradually in time, either they -- we have problem loans in that covered portfolio that we resolved through the normal process of foreclosure or worked out and so forth, or we would have these clients gradually converting to the non-covered portfolio. So you will see the covered loans continue to pare down. But then as you have seen for the last 2 years, we have continued to have very nice, profitable growth in our non-covered loan portfolio. So as non-covered loans continue to increase in size, we would offset against the decrease in size of covered loans. So all in all, my sense right now is that we most likely will stay relatively stable and will be a very small -- I mean, percentage growth in terms of overall balance sheet and our profitability will continue to maintain high. If we have some incredible, great opportunity coming to us from an acquisition point of view, we never hesitate to make a move on that. We have plenty of our capital, and we have all the human resources available to do an acquisition deal. On the other hand, we do not need to use acquisition to grow our earning per share. So therefore, we're going to manage our capital very efficiently. As I said, we will look at where we are today. If there is not some very strong, incredible candidate that's standing in our sidelines waiting for us to have, then we will continue our capital management, which is increase our dividends, buying back shares going forward in the next year or 2, and continue to transform the balance sheet by putting on more C&I loans, having more low-cost commercial deposits and less reliance on real estate. But we have made some really good progress for the last 2 years in terms of dramatically increasing the C&I loans in a prudent and in a conservative way, and also substantially increasing our DDA demand deposits. As we've mentioned earlier, we have now a record amount of $3.7 billion of demand deposits. So one day at a time, one month at a time, and one quarter at a time, we are making those certain to keep our balance sheet stronger and stronger. And also make ourselves substantially more relevant to be that financial bridge between the east and west and doing business between U.S. and China and helping our U.S. clients to expand their business in the Asia region and vice versa. And that is our niche and that's what we do best. And I think that there will be plenty of great opportunities for us to come.

Next question is from Herman Chan, Wells Fargo Securities.

I wanted to follow up on the $100 million expected quarterly commercial growth. Do you see future loan growth driven more by trade finance or more traditional C&I? And also, can you give an update on the buildout of the commercial platform and some of the lending that -- such as entertainment, technology, et cetera, that you've highlighted in the past?

In terms of C&I and trade finance, I would say that it's a pretty much just growing proportionally. And so we are -- continue to have good momentum from both side. The reason is because, as you said earlier, we continue to build out industry expertise in various industries that is relevant to the U.S.-China investment and trade arena. So clearly, from technology to entertainment, health care to import-export related to agriculture, seafood, et cetera, those are all relevant industries. We are building our expertise. So within that arena, I think that some of these clients that we bring in are going to have to import and export elements. While the others, while besides taking care of the import-export business, many of them still have their working capital line needs and then they need to get term loans from us in terms of certain types of activities that's go on in the commerce side. So in that regard, I think that we will expect continuing growth in both regular C&I and also trade finance, with the emphasis on industry that are relevant to the U.S. and Asia region.

Great. And as a follow up on the residential mortgage side of things, there's been some concern from other players on the potential involvement with the CFPB regarding these lower doc originations. Can you give us an update on the regulatory fronts regarding these ones?

Well, at this time, nothing has been finalized. We will monitor. What we do is that we will only do things that are allowed. At this time, that's what we do.

Next question is from Jonathan Elmi, Macquarie.

Just a 2 quick -- so just 2 quick follow-ups on the guidance. First, on the full year 2012 guidance, just wanted to confirm, does that include any portion of the share buybacks remain?

No, it does not. It does factor in the shares that we already bought back in the first quarter, Jonathan, but not any remaining.

Got it. Then the second question was just on the FHLB prepays and the repo restructurings. When exactly that those occur during the quarter?

They go probably at the midpoint of a quarter.

Okay. So just trying to get a sense for -- to what extent there's going to be some follow through benefits and margin from those actions. But sure sounds like there should be a little bit then.

There should be a little bit. Point-to-point, when we look at our year end to the first quarter and the benefit, it's probably about 23, 24 basis points.

Next question is from Joe Gladue, B. Riley. Joseph Gladue - B. Riley & Co., LLC, Research Division: I'd like to ask, I guess, a couple of numbers questions on asset quality. First, could you give us the number on performing TDRs at quarter end?

Yes. At quarter end, performing TDRs were about $30 million. Joseph Gladue - B. Riley & Co., LLC, Research Division: Okay. And just in general, what were the trends in classified loans and close to non-accruals?

Overall, I think you can see the results from our reduction that we had in the nonaccrual loans, but the trends were positive overall. Classified assets did come down a little bit. Movement into nonperforming loans also came down. During the first quarter, the movement into NPL was about $30 million as well. And as you recall, that's down from probably about $50 million or so in the fourth quarter. Joseph Gladue - B. Riley & Co., LLC, Research Division: Okay. And I guess lastly, I guess I'll ask a little bit about your China business. Yes, of course, there's continually changes in regulations and the economic environment in China. Just wondering if you could touch on anything significantly, positive or negative for your business there and what the overall outlook is.

Well, first of all, we have -- from the overall Greater China region, I'm combining Hong Kong and China together, our total loan portfolio is actually less than $0.5 billion. So it's a very small percentage to the overall balance sheet. Now keep in mind though, our strategy to be that bridge between east and west is not to make our Greater China portfolio to equal in size in United States is that build the expertise of knowing how to do business between U.S. and China so that we can become a substantially much more attractive financial institution to our U.S. customer base, who do have either a presence in China or looking into expanding over there or the fact is, most companies in the United States right now are importing goods from China. So our expertise becomes extremely available for all of these U.S. clients who needs to deal with the Greater China region. And that's the purpose, not to go in there in China and trying to find enough asset to book to equal to what we have in United States. That being said, and that's why the -- any of these political or economic volatility over there did not have as big of an impact to us. Secondly, we are still in the buildout mode. When I say buildout mode, is that it took us a while -- starting day 1 when we took over United Commercial Bank back in November of 2009, we took over a loan portfolio from United Commercial Bank in China with over 30% NP -- nonperforming loans. And we, as of today, have just completed the cleanup and has now got the nonperforming loans from 30%-plus down to 0. So which is I think to the regulators in China a great accomplishment. And so we are now in the process of building the infrastructure capability in terms of a system upgrade. A lot of the back office system upgrade in terms of computer, online banking and so forth, we are in the process of doing that. We are also in the process of recruiting new talent, commercial banking talents, coming to the bank. So we're still in that growth mode. So you would not be seeing a lot of activities until we have complete the buildout of the infrastructure and also the adding the human resources. Then I think that we will have a lot more coming. Now the other thing I want to highlight also, people heard a lot of news about China that the economic condition is coming -- is slowing down and people are getting concerned about how this slow economy in China would affect the global economy, et cetera. I think those are all legitimate concerns. However, keep in mind that China went from over 9% GDP growth. And in fact, years ago, over double digit GDP growth per year now down to 8.1% or a little bit -- maybe even potentially someday, be less than 8% or even dramatically come down to 7.5% or something like that for GDP growth. But we've got to keep that in mind is that even for that kind of growth, it's substantially, substantially higher than most of the countries around the world so for small little East West Bank in China, we'll find our business. I mean, it's much easier for us to double our size or triple our size at any time, any day, in a vast economy like that. And with a GDP, which dramatically dropped down to still over 8%. I think that's still an extremely attractive environment for us to do business. And more importantly again, once again, I highlight the fact that we are not looking into the consumer market in China. We're looking at just helping U.S. clients to do business in and between U.S. and China. Then we've got to be looking pretty good going forward in the next few years in terms of our U.S.-China strategy.

Our next question is from Joe Morford, RBC Capital Markets.

Really, the first question is just a follow up on that last one. I was I guess curious what amount of loan growth you are targeting for the China region this year, especially now that you no longer have to fight the pay down of NPAs. And also, can you quantify what kind of spending you intend to make on these infrastructure investments and hires over the next year?

In terms of the loan growth in China, I think the difference is that last year, we had the opportunity of the cross-border loan guarantee program put out by the Chinese government, that allow us to actually have a very nice loan growth, both in the -- particularly for our Hong Kong branch, working with our branch in China. So the quota was up, as I mentioned last year, that we use it up fairly quickly. So we are waiting to find out this year what the new regulation is and then how much allocation we get. If we get a nice increase, and I expect that we would do quite well, in terms of that loan growth for Hong Kong and then China. If we don't, then I don't see there's much growth opportunity for us there. So it's a combination that we do have a much better position without these nonperforming asset to deal with over there. I think that will put us in a much better position in terms of having the flexibility to grow along. However, the constraint will come back to what kind of quota is available on the regulators over there that will allow us to expand, because we are not as interested in doing too many unsecured type of credits. I mean, these cross-border guarantee loan, the nice thing about it is it's 100% secured by either deposits or standby letters of credit from these customers. So therefore, either way, I mean, those are very secured deals. And then those are the kind of things that we like to do more. Now in terms of infrastructure and expenses and so forth, the gain -- because our operation in Hong Kong and China is relatively small, so the expenses would not be in any way material that would affect our overall G&A expenses for the next 9 months or so.

What's most of these are capitalized and amortized over time.

We have the infrastructure expenses capitalized but the human -- I mean, human resources, the personnel and obviously, that's part of the G&A expenses. It will, I mean, it will increase our payroll as we talked about just like any of these C&I lenders that we hire in the United States, in California or New York and so forth, it will increase our payroll. But on the other hand, when we bring these people into generate revenues, to generate business, we expect that between the net interest income and the fee incomes will be more than offset against the payroll expenses that will come to us.

Okay. That's helpful. And then one other question was, just wondering if you could talk about the decrease in risk-weighted assets this quarter, which is just under $600 million or about 4% in the quarter. And just kind of what would be the real drivers to that?

Sure, Joe. If you look at our balance sheet, we did have more cash at March 31 versus year end. And so there are a lot of assets that move really -- we sold the securities up from 100% risk-weighted to 0, and that's probably the primary reason for that.

Our next question is from Jennifer Demba, SunTrust Robinson Humphrey.

I just have 2 questions. Irene, I was just wondering if you could quantify the impact to compensation costs from the lower deferred loan fees? And also, Dominic, if you could just talk to the -- what you're seeing in terms of the pipeline acquisitions or discussions you're seeing any changes there?

Jennifer, on the first part of your question, I think it was about the impact to compensation expense for the lower deferred comp. It's about deferred fees -- excuse me, it's about $4 million for the quarter.

In terms of pipeline for acquisition, we currently do not have a pipeline.

Okay. So you're not seeing any increase in discussions despite the fact that we've seen over the last month or 2, just more activity in the industry in general?

I think that there are always -- there's always activities, there's always discussion and there are always -- I'm seeing that quite on a daily basis. The only difference is that from our perspective is that, it's always -- we think it's relative. What we look at what we're doing right now is that nice organic growth, very controllable type of execution in terms of specifically targeting the type of industry where we grow our loans and finding the right type of account officers that can help us to get more demand deposit and lower cost of funds. And in a much more controllable expansive risk management point of view, it just makes it hard for us to find attractive investment target. I think a good example will be, as just recently, many of you have seen Specific Capitals sold to Union Bank for a pretty large premium. And those are kind of things that East West Bank would never, never get into this type of activity in terms of paying that kind of premium and ultimately have to just work ourselves, I mean, to a very, very sort of like a challenging situation to make up for that goodwill. And it just -- it just, to us, it's just not a strategy that we would like to pursue.

[Operator Instructions] Our next question is from Gary Tenner, D.A. Davidson. Gary P. Tenner - D.A. Davidson & Co., Research Division: Irene, I was just still curious about your guidance on the margin and I wondered if maybe just one way of looking at it, could you kind of talk to the first quarter margin a little bit? Obviously, that was above your expectations. Maybe talk to the factors that kind of really drove that 20 or 30 basis points above where your guidance was in the first quarter?

Sure, Gary. I think first and foremost when we look at the margin for the first quarter, overall, compared to our forecast and our expectation, we were able to reduce the cost of deposits substantially more. Obviously, we know how much is going to mature every quarter on the CDs, which is the largest variable there. At exactly what tenure it goes into, there are some uncertainty and also what the market competition will be. So that was the largest driver, more positive than we had expected, which is obviously great for us. Additionally, some of the actions we took to restructure the borrowings was not something that we had factored in from day 1 of our guidance. And then last, I would say on the asset side, overall, compared to maybe our little conservative forecasting are interest income on the loans, covered and non-covered, held up a little bit better than we had forecast. And we had a little bit more accretable income. We normally forecast at the net accretable income is about $15 million. And every quarter, it seems like $15 million is something that's achievable. This quarter is a little bit higher as well at $17 million. So all of those factors helped keep that margin high. And then additionally, I would also say that overall, the interest earning assets did come down, inch down a little bit, so overall, our strategy has been more retaining the higher-yielding, more profitable businesses kind of reducing some of the lower yielding assets. Gary P. Tenner - D.A. Davidson & Co., Research Division: Okay. And that kind of goes to my follow-up question, in terms about the non-covered loan yields, I think the yields were only down 3 basis points in the quarter from fourth to first? Are you anticipating -- is there a large slug of loans that are scheduled to reprice coming up here in the second or third quarter or how do we kind of think of how you're managing the yield on the non-covered portfolio?

No, we don't have any anticipation of any loans coming to you that will have a substantial repricing. But what we do have is that we do have a very conservative view about competition. So this is, I think a speculation. Hopefully, we are wrong and then our margin will be very strong. But the reality is that we just think that a lot of banks out there who do not have a very strong niche or a very strong strategic direction, they're going to need to use pricing to hold their balance sheet, to get things going. And so there are going to be banks out there, the minute that every quarter go by, there will be another 1 or 2 banks who are out of MOU or CND and then ready to be in business. We just expect that when it comes to that point that many of these banks particularly community banks, their primary focus will be going back to get CRE loans. Because that's what they're good at and that's what they do. And when they all start coming back in time, I guess, CRE loans and in the primary business that they know how to do is CRE, I would expect that there's going to be a lot of competition that will drive the pricing down dramatically. Now that's what our speculation is. It's that in time, now we expect it by now there will be a dramatic competition that is happening. It hasn't happened yet. And in fact, that's why, in the first quarter, other than the Wells Fargo and a few others, it hasn't quite happened yet. But just natural to expect that it will happen in time. Would it be the second or third quarter? Or it will be the fourth quarter, but in time, they will come. So with that in mind, I think that we just think that it's only prudent that we expect that loan yield will come down, because at some point in time, even extremely loyal and great East West Bank customers are going to ask and say, why don't East West Bank get real, this is what the market is and this is what your rate is, when are you going to come down? And then we will need to get our rate down to match some of these competition.

Our next question is a follow up from Joe Gladue, B. Riley. Joseph Gladue - B. Riley & Co., LLC, Research Division: Just wanted to touch on the, I guess, provision and reserve build. The first quarter you -- the provision was considerably larger than the net charge-offs. I understand your -- I guess keeping the allowance at a pretty steady percentage of total loans. But at the same time, with nonperforming assets coming down, it's -- I guess, the reserve is approaching 2x nonperforming loans. Just wondering how that's impacting your thoughts on provisioning going forward.

Sure, Gary. So as you mentioned, you're exactly right. The total allowance to total non-covered loan ratio, we maintain that at 2.04% as of the end of the first quarter and also the end of last year. What we're looking at is the overall kind of reasonableness in the allowance. The actual provision and charge-off. Charge-offs are really a cash kind of basis. Lots of times, there are loans where we reserve for it in the past and the cap charge off is when we take the charge-off that you see in the quarter. So overall, we look at the reasonableness of the overall allowance. Also, I say, maybe compared to all of our peers, we do have more loan growth in the C&I side and single-family side as well. So we're continuing to reserve for that. And also, in the quarter, you'll see in our allowance table in the press release, we put note and disclosed that we did increase the allowance on the loans that are covered. But they're additional drawdowns on that. The specifics of the accounting of that, I'd be happy to talk to you maybe off-line.

This concludes our question-and-answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks.

I just want to say thank you again for all of you who joined our call this morning, and I look -- we all look forward to talking to you again in July. Bye-bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.