East West Bancorp, Inc. (EWBC) Q3 2012 Earnings Report, Transcript and Summary

Kelly Adams Dominic Ng - Chairman, Chief Executive Officer, Member of Executive Committee, Chairman of East West Bank and Chief Executive Officer of East West Bank Julia S. 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

Herman Chan - Wells Fargo Securities, LLC, Research Division Joe Morford - RBC Capital Markets, LLC, Research Division David Rochester - Deutsche Bank AG, Research Division Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division Ken A. Zerbe - Morgan Stanley, Research Division Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division Gary P. Tenner - D.A. Davidson & Co., Research Division Michael Turner - Compass Point Research & Trading, LLC, Research Division Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division

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

Good morning and thank you for joining us to review the financial results of East West Bancorp for the third 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. 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 for joining on our earnings call. East West reported healthy earnings of $71.1 million or $0.48 per diluted share for the third quarter of 2012. Our net income increased by $8.7 million or 14%, and our earnings per diluted share increased $0.07 or 17% from the prior year period. As compared to the prior quarter, East West grew earnings by $553,000 or 1%, and increased earnings per share by $0.01 or 2%. Our steady financial performance in the third quarter was driven by healthy growth in our loan and deposit portfolios, which resulted in increased total revenue, net income and earnings per share from both the prior quarter and prior year period. Our third quarter net income of $71.1 million was the highest in the last 11 quarters, resulting in a solid return on assets of 1.3%, and return on average common equity of 12.43%. We grew our non-covered loans, excluding loans held for sale, by $360.3 million or 3% quarter-to-date. This increase in our non-covered loan portfolio was primarily attributable to growth in commercial and trade finance loans, commercial real-estate loans, and also, single-family loans. The growth in commercial and trade finance loans in the third quarter is the continuation of strong momentum from the first half of 2012. Year-to-date, we have grown our non-covered commercial and trade finance loans by $590.3 million or 19%. In the third quarter of 2012, we continued our focus on attracting low-cost core deposits. As of September 30, we reached record levels of both total deposits and core deposits of $17.7 billion and $11.4 billion, respectively. I'm pleased to say that, once again, the strong growth in core deposits was fueled by an increase in noninterest bearing deposits. Again, as of September 30, we had $4.1 billion in noninterest bearing demand deposits, totaling 23% of our total deposits, the highest ever in the history of the bank. Although the low interest rate environment and the economy continue to be challenging for our industry, East West continues to perform well and outperform many of its peers, with high growth profitability and returns to shareholders. As a financial institution focused on the U.S. and Greater China markets, we have an inherent competitive advantage over our peers in winning new customers and retaining existing customers who need our expertise, services and operating platform between the United States and the Greater China region. Our strong growth in non-covered commercial and trade finance loans in the third quarter, and over the last several quarters, is indicative of this advantage over our peers. In summary, we believe that our strong results during the third quarter and year-to-date will continue through the remainder of 2012, resulting in another year of record earnings for East West. Not only have our net income and earnings per share increased, the year-to-date, tangible book value is also up 7% to $13.07 per share. Additionally, we have returned $243 million back to shareholders, in the form of common dividends and the repurchase of common stock in the first 9 months of 2012. East West have proven that it can perform well even in challenging operating environments. And I'm confident that we'll continue to do so in 2013 and beyond. With that, I will now turn the call over to Julia to speak in more detail about our key successes in the third quarter of 2012.

Thank you very much, Dominic, and good morning to everyone. I would like to spend a few minutes discussing, in more detail, the solid loan growth we experienced during the third quarter and then discuss the net interest margin, and our expectations for the future. Finally, I will discuss the guidance we provided in the earnings release yesterday, for the fourth quarter and full year of 2012. In total, our loan portfolio increased $142.4 million or 1% quarter-over-quarter. Non-covered loan balances, excluding loans held for sale, increased 3% or $360.3 million during the third quarter to $11.2 billion at September 30, 2012, while covered loans decreased $238 million or 7%, from June 30, to $3.2 billion as of September 30, 2012. During the first half of 2012, the steady growth in the non-covered portfolio was offset by decreases on the covered portfolio, so we were pleased to see this increase in total loans from June 30 to September 30, 2012. The growth in our non-covered portfolio for the third quarter of 2012 was driven by strong growth in commercial and trade finance loans, commercial real-estate loans and single-family loans, which I will discuss in more detail. Non-covered commercial and trade finance loans increased $314.1 million or 9% to $3.7 billion. Combined, total non-covered and covered commercial and trade finance loans increased to $4.3 billion or 30% of our total gross loan portfolio as of September 30, 2012, up from 28% of our total gross loan portfolio as of June 30, 2012. The growth in non-covered commercial and trade finance loans during the third quarter stemmed from strong growth across many sectors, including trade finance, manufacturing, health care, technology, and entertainment and media. Additionally, during the quarter, we continued to experience strong demand in our markets for commercial real-estate loans and single-family loans. Our commercial real estate loan portfolio and single-family loan portfolio grew $74.6 million or 2% and $47.7 million or 2%, quarter-to-date, respectively. Total commercial real estate loans, including both non-covered and covered loans, totaled 35% of our loan portfolio, and we are well under the FFIC see guidelines for high CRE concentration, at 258% of total risk-based capital as of September 30, 2012. As such, we are comfortable growing commercial real estate loans in the fourth quarter of 2012 and in 2013, proportionately, as our total loan portfolio grows. Single-family loan originations continue to be strong. We originated 440 loans, totaling $135 million during the third quarter, with an average loan size of $300,000 and a loan-to-value of 49%. Our single-family loan originations are almost entirely from our retail branch network. As previously mentioned, our underwriting criteria for single-family loans are very high, and we require very high down payments and low loan-to-value ratio. Historically, the credit quality for our single-family loans has been outstanding regardless of the real estate cycles, and we attribute this largely to the high down-payment requirements. Next, I would like to spend a few moments discussing the net interest margin for the third quarter and our expectations for the fourth quarter of 2012. Net interest income, adjusted for the net impact of covered loan disposition, totaled $196.3 million for the third quarter of 2012, an increase of $1.6 million from $194.7 million in the prior quarter. The core net interest margin, excluding the net impact to interest income of $25.6 million, resulting from covered loan activity and amortization of the FDIC indemnification assets, totaled 3.95% for the third quarter of 2012. This compares to a core net interest margin of 4.01% for the second quarter of 2012. The increase in net interest income, of $1.6 million from the prior quarter, stemmed from the solid growth in loans resulting in higher average earnings assets of $265.6 million or 1% quarter-over-quarter. Although we were pleased to see increased net interest income, we expected that the core net interest margin would decline from the second quarter and expect it to continue to drift downwards as the low interest rate environment continues. We are committed to ensuring appropriate and prudent interest rate risk management and are focused on balancing short-term gain, today, versus longer-term profitability by managing the duration in our loan and investment portfolios. We are actively taking opportunities to reduce overall funding cost and higher cost time deposits. During the third quarter, we paid off $75 million of subordinated debt which carried a rate of 1.6%. Additionally, we reduced the cost of deposits 4 basis points, from 45 basis points in the second quarter to 41 basis points in the third quarter of 2012. We are confident that we will have other opportunities to maximize our net interest margin while maintaining prudent interest rate risk management for the remainder of 2012 and in 2013. Additionally, as we look forward to 2013, we believe that there's a lot of clarity with our earnings power, and at this time, are comfortable for the full-year net income in 2013 will grow from the full year of 2012. Additionally, as discussed in the second quarter earnings call, with our strong profitability and capital levels, we expect to submit to the board our 2013 budget and strategic plan, in early January 2013, which will include another $200-million stock buyback and a 50% increase in dividend, to $0.60, for 2013. Lastly, I would like to provide a brief summary of our guidance for the fourth quarter of 2012. As in the past, in our earnings release yesterday, we provided guidance for the fourth quarter of 2012 and the full year of 2012. We currently estimate that fully diluted earnings per share for the full year of 2012 will range from $1.87 to $1.89 or an increase of 17% to 18% from our earnings per share of $1.60 for the full year of 2011. This updated guidance for the full year of 2012 is also an increase of $0.03 from our previously released guidance in July. We currently estimate that fully diluted earnings per share for the fourth quarter of 2012 will range from $0.47 to $0.49. With that, I would now like to turn the call over to Irene to discuss our third quarter 2012 financial results in more depth.

Thank you very much, Julia, and good morning to everyone. I'd like to discuss our financial results for the third quarter of 2012 in more detail, specifically as it relates to credit quality, noninterest income and noninterest expense. Starting with credit quality, we are pleased to see that asset quality metrics continue to improve in the third quarter of 2012. Nonperforming assets declined to $144.1 million as of September 30, 2012, a decrease of $11.6 million or 7% from the prior quarter. Total net charge-off on non-covered loans also decreased to $10.6 million for the third quarter of 2012, from $11.7 million in the second quarter of 2012. Additionally, nonaccrual loans, excluding covered loans, decreased to $104.1 million as of September 30, 2012. Total nonperforming assets, excluding covered assets, were down to 66 basis points of total assets as of September 30, down from 72 basis points of total assets at June 30, 2012. The provision for loan losses for non-covered loans declined to $13.3 million for the third quarter of 2012, a decrease of $3.3 million or 20% from the prior quarter, and a decrease of $9 million or 40% as compared to the third quarter of 2011. East West continues to maintain its strong allowance for non-covered loans at $223.6 million or 2% of non-covered loans receivable as of September 30, 2012. Overall, we expect credit quality to continue to improve and estimate that the provision for loan losses for non-covered loans will be $10 million to $13 million for the fourth quarter of 2012. During the third quarter of 2012, the company recorded provision for loan losses on covered loans, of $5.2 million, resulting largely from charge-offs of $6.5 million on 3 covered loans outside the scope of ASC 310-30. As these loans are covered under loss share agreements with the FDIC, the company reported income of $5.2 million or 80% of the charge-off amount of $6.5 million in noninterest income as a net increase in the FDIC receivable, resulting in a net impact to earnings for the third quarter of a loss of $1.3 million. Moving on to noninterest income and expense, East West reported noninterest income for the third quarter of 2012 of $2.8 million, an increase from noninterest loss of $11.7 million in the second quarter of 2012, and noninterest loss of $13.5 million in the third quarter of 2011. The increase in noninterest income from the prior quarter and prior year is primarily attributable to a decrease in the net reduction of the FDIC indemnification asset and FDIC receivable. In total, branch fee, letter of credit and foreign exchange income, loan fees and other operating income increased for the third quarter, and totaled $24 million, an increase from both the prior quarter and the prior-year period. The increase in fee income during the third quarter of 2012 was largely due to increases in foreign exchange income. In addition, included in noninterest income for the third quarter 2012, were net gains on sales of loans of $5.3 million and net gains on sales of investment securities of $93,000. The $5.3 million gain on sale loans in the third quarter was primarily due to the sale of $140 million in government guaranteed student loans. Moving on to noninterest expense, total noninterest expense for the third quarter, excluding amounts to be reimbursed by the FDIC and prepayment penalties on other borrowings, increased $1.3 million or 1% from the second quarter 2012 to $97.9 million. The increase in noninterest expense, net of the amounts reimbursed by the FDIC and prepayment penalty on other borrowings was primarily due to an increase in legal expense, offset by a decrease in compensation and employee benefits. Compensation and employee benefits decreased $2.4 million or 5% from the second quarter of 2012, primarily due to a decrease in payroll taxes and an increase in the offset to compensation expense, from deferred loan cost, due to an increase in origination volumes in the third quarter. Credit cycle costs, which included other real estate owned expense, loan-related expense and legal expense, increased $2.1 million or 16% from the second quarter of 2012, totaling $14.9 million for the third quarter, as compared to $12.8 million for the second quarter 2012 and $15.7 million for the third quarter of 2011. Of the total credit cycle cost incurred in the third quarter, $3.8 million is related to covered loans, and other real-estate owned, for which we expect that 80% or $3 million will be reimbursable by the FDIC. Finally, as stated in the earnings announcement released yesterday, East West has declared fourth quarter dividends on the common stock and the Series A Preferred Stock. The common stock cash dividend of $0.10 is payable on or about November 23, 2012, to shareholders of record on November 9, 2012. The dividend on the Series A Preferred Stock of $20 per share is payable on November 1, 2012, to shareholders of record on October 15, 2012. I will now turn the call back to Dominic.

Thank you, Irene. I would now open the call to questions.

[Operator Instructions] Our first question is from Herman Chan with Wells Fargo Securities.

Can you talk about the puts-and-takes for the margin guidance for the fourth quarter and any preliminary thoughts on the trajectory of the margin going into next year?

Well, when we look at the margin for the fourth quarter, Herman, we do see that -- when we look at the earning assets, we expect that to drift down. However, we see some opportunity with the funding with the CDs, with the higher cost deposits and also, maybe even more importantly, with the growth that we've been having in the loan portfolio. When we look at the pipeline, it's very active. So when we look at the earning assets, we also see that the total volumes alone should increase, and the mix of the earning assets should improve as well. Preliminarily, we're working on our budget and our analysis for 2013. At this point in time, when we look at 2013, we're looking at a NIM of probably for full year, 3.80 to 3.85. And we think that, that's achievable given kind of the trajectory of our portfolio.

Great. And with the pickup in CRE, can you give us some color, what you're seeing from an origination standpoint? Should we get the sense that the bank is reengaging in that broad [ph] sector markets? And what do you think from a yield standpoint? As it seems like competition is still fairly intense on the CRE side these days.

We see the CRE, that we are doing right now, are mostly from relationship customers. Customers that we have known for quite some time, that are either buying properties or started to develop some of the properties. And the pricing is competitive but we believe that we will still get pretty decent yields on those portfolio.

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

The commercial loan growth continues to be fairly broad-based. Are you finding customers in these various niche sectors more confident in making investments, or broadly speaking, is it being driven more by market share gains? And along those lines, how important are you finding the ties to China in terms of winning this new business?

Joe, I think that in terms of a customer point of view, in terms of these loans that we are getting, originating, for the last several quarters. I think, mainly, these are sort of like our ability to take share from the market. I think there's less of customers who are expecting a robust economy and then asking for increase in line. Most of these loan growth are getting new relationship. I mean, that's one. The other part is that, as I said, both is that -- the other part is that, because of our exclusive focus on this U.S.-China relationship, there are a lot more opportunities for us in terms of companies from China that are coming to United States to make investments, and invariably, many of them look at East West as one of the first banks to call. And so we end up having less competition when it comes to that type of opportunity. Because, normally, I think it'll be much more challenging for our -- much more challenging for our clients to -- much more challenging for us to compete for business when these are customers that everybody wants. But when it comes down to business that -- with the investment coming from China and then having us to help them to connect, from real estate to entertainment to sometimes clean-tech area. These are the business that we have substantially less competition because of the value-added service that we provide, that naturally make us the winner in terms of the banking services. So, it's a combination of working with business, in U.S. and China, that in that niche that actually have less competition for us and there are also more and more of that type of growth that are happening in the U.S. The foreign investment, coming from China for the last few years, have continued growth in an exponential way. So in that regard, we would expect that, even going [ph] 2013 and beyond, we're always going to get a lion's share of that type of opportunities. And then meanwhile, we continue with our industry focus and various industries that we have set-up, the right platform, for the last 24 to 18 months or so. And I think that we have the ability to, also, go out and get market share within U.S. market. So it's a combination of these 2 to get us into more additional business.

Okay. That's helpful. And then I guess the other question was just on the deposit side. Irene, you mentioned saw opportunity to maybe do some things with the higher cost deposits. Your CD costs are still upwards of 80 basis points. You have a fair amount of liquidity, still, in the balance sheet. Are you going to start pricing goes down more aggressively or what types of things could you be doing here?

Well, Joe, I think maybe not more aggressively. As you look year-to-date, we've continued to reduce the cost of deposits quite substantially. Early part of this year, and the latter part of last year, a lot of that had to do with the repricing, downward, of CDs. We expect that to continue. When we look, also, at the mix of the deposits, and Dominic talked about in the prepared remarks, the noninterest bearing DDA deposits continue to grow. So as that mix changes, overall, we expect that we'd be able to kind of continue that momentum and continue to have the cost of deposits come down as well.

Your next question is from Dave Rochester at Deutsche Bank.

So are you thinking that this level of loan growth you have is potentially sustainable given what you're seeing in the pipeline at this point? I mean, could we see another $300 million of growth in C&I next quarter as well, or could that actually increase from here?

We have been projecting -- expecting about $100 million a quarter. But given the pipeline, we do think that it will be more than that. However, the $300 million, we are very fortunate that the third quarter is at that level. We wanted to be more conservative and not expecting at that level of growth each quarter. And I think that going forward for next year, we're looking at the net-net loan growth of 5% for the total loan portfolio. And it will be across-the-board because not just C&I loans, but commercial real estate, single family will continue to contribute to that loan growth in 2013.

I think from a planning perspective, I think that we have always been leaning towards more prudent conservative budget and plan. The idea is that C&I loans is something that I know that the trend today in banking is everybody wants to book C&I loans. But when the market goes south, these loans can be very challenging to manage. So we are very prudent in terms of -- from an underwriting standpoint, and we want to make sure that the loans that we get are high-quality loans. So that one way to ensure that is to not put too much pressure from our lending team in terms of they have to crank up a lot of the C&I loans because unlike a single-family mortgage loans, which at the underwriting is a little bit more simplistic. C&I loans is a bit more challenging. So that's what, from a planning standpoint, that's what we do. But from a market perspective, I would say that we have been successfully getting favorable surprises. And I also think that even in 2013, there's also a good probability we'll get favorable surprises because from a market perspective, we do have a niche that allow us to have more opportunities to have C&I transactions that, to a certain degree, that the credit is relatively safer and also the competition is less. And as long as we continue to stay in that direction, and if I look at where we are today, I don't see there are much changes. In fact, I see even more opportunities because as I said earlier, despite the fact that the China GDP is slowing down slightly. Their commitment to follow their 5-year strategic plan to have more of the business to go oversea to make foreign direct investment in places like U.S. is still very high. So recognizing that's happening, I think that we will invariably going to get more opportunities from that angle. And the other thing is that as we have more industry expertise in various other high-growth industry that related to U.S.-China trade and U.S.-China investments, we will also naturally pick up more domestic U.S. small middle market clients, who understand what we are good at, and naturally, start aligning their business with us than with other community banks who are not focusing globally or who are not sort of like have -- who does not have the kind of expertise to understand what does it mean when China economies, I mean, GDP now dropped to 7.4% versus like 8.5%. If banks here do not understand the ramification of some of these dynamics, it does not serve their clients well. If their clients are actually are exporting or importing from the Greater China region. So those are kind of opportunities that we think we will pick up more and more. So while the market seems to be favorable, I think we'll continue to want to budget conservatively, simply for the fact that the global economy is not very positive. What's happening now in the U.S. from our fiscal policy issue and what's happening in Europe, we have to be realistic that it's not going to be a high-growth economy in the next few years from a global perspective and also from the United States perspective. So in that regard, I think net-net, everything balance out and that's what we're projecting.

And that makes a lot of sense, I appreciate that color. And the 5% that you're talking about for next year, that would include, I guess, covered loans run off as well?

Correct. Yes.

Great. And just switching to the NIM real quick, do you have the scheduled accretion in 3Q? The number that's comparable to that $16 million, you guys talked about for 2Q, by any chance?

Yes, in the third quarter, we talked about how it's hard to predict it because the capital activity varies. The amount of accretion that flow through P&L was about $25 million.

So $25 million? Okay.

That's right.

And then what are you looking for, for next quarter that's built into your margin guidance?

We [indiscernible] about the same. At -- that's what we're looking at, at this point in time.

Okay. So from this point on, it sounds like it may be just reset to a higher level, so $25 million a quarter, at least through maybe 2013 or something like that?

$20 million to $25 million. As we've talked about this extensively, it's hard to predict. But it's just kind of with the activity that's been occurring in the last couple of months. It does seem to be a little bit higher.

And what is the amount that's still left in the books to flow-through?

As of the end of September, we have about $109 million of a net accretable yield.

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

Most of my questions have been asked, but I wanted to follow-up on the C&I growth line of questioning. Dominic, you said you have some pretty careful underwriting standards in these loans. Can you just talk about your tolerance in terms of size of loans and the sweet spot you're sort of trying to go after in terms of size?

In terms of size, I think ideal size is from $5 million to $20 million. And that's what we've been pretty much doing somewhere around that range. Obviously, we have a lot more smaller loans. And I would say that in terms of the target that we are going after are mainly from $5 million to $20 million. Occasionally, we have a few loans that we feel that the quality of these clienteles are such that we are willing to step above the $20 million zone but very, very few, very few. Now I would say that as an average, size probably is less than $10 million, as an average.

Our next question is from Ken Zerbe with Morgan Stanley.

Julia, I think you always mention this in passing, but you said that you had opportunities to improve NIM. I was wondering, were you thinking and of anything, in particular, such as liability management? I mean, something more unusual than just other than the blocking and tackling?

No. Just managing on the liability side, on the deposits and prudently look for investment opportunities. And that's difficult. But from time to time, in something that we are very comfortable with the interest rate risks and duration. And we'll continue to look at paying off the Federal Home Loan Bank advances when the opportunities come up. So nothing changes like before and that's why you see that our cost of fundings -- we were able to reduce it from quarter-to-quarter, but it is getting harder and harder. The low interest rate environment, despite of the fact that we get so much noninterest-bearing DDA, which will be very, very good and very profitable when interest rates go up, at this point, it doesn't give us the kind of margin that is normally does. So we'll continue to manage, and the good thing is at this time, as Irene have mentioned, we feel that 3.80 may be the floor, the bottom for 2013 as opposed to a much more severe compression of net interest margin. So at this time, we feel fairly comfortable that it's 3.80 to 3.85, net interest margin is doable for 2013.

And that's on a full year basis?

Correct.

Okay. Just one follow-up on the C&I growth, have you guys looked -- or tried to quantify in any way, how much of the C&I growth of the borrowers are related in some aspect to the whole China trade versus just a core California-based commercial borrower that is not related to China? Does that make sense?

We don't have a -- I mean, we don't actually have a very clear statistics -- every time we book a loan, we classify them as California or based -- or related to U.S.-China trade or investment. However, I would say that from a marketing perspective, often time, what we'll find is that there are business that look very much vanilla. They may be just a U.S. entity that doing banking with other community banks and then switch to us. But invariably, I would say that our expertise of knowing opportunities in Greater China and Asia region. And also our network connection with knowing the potential capital source coming from Asia are somewhat appealing to many of these clients who would like to sort of like bank with us. So to that extent, I think that quite a few of our clients come to us is from that direction. The other part will be once we get clients that may initially come to us because of our ability to understand the export or import side of doing business in China better, they have -- they're friendly, either clients or competitors that sometimes, they will be a great referral source for us to refer us to other business that may not have anything to do with the U.S.-China trade. So in that regard, I think it's really a combination of continue to do good work and making sure our services deliver is more than satisfactory to our clients and then counting on them, basically one customer at a time, to help us to promote and spread the goodwill to other prospect. And we are, in fact, for the last -- we have been for the last many years, and just basically using that kind of formula and direction in getting customers.

Our next question is from Brett Rabatin at Sterne Agee. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: Was just hoping to get some clarity, maybe or some thoughts around credit leverage especially as we move into 2013, you've got a really healthy reserve level and credit continues to obviously, improve. Can you give us some thoughts maybe on provision versus net charge-offs past fourth quarter in terms of just kind of how you view things trending in that perspective?

That will be our earnings leverage for next year would be the provision should continue to go down and so is the net charge-offs. One of the reason why we expect next year earnings to grow is the reduction in the provision, as well as some credit cycle costs that should continue to go down in the next couple of years. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: Okay. And then the other question I wanted to ask was just around the residential production and that portfolio, in terms of low documentation type loans. Has the change in regulations, is that going to impact that portfolio in any regard in terms of out of the current portfolio or the potential for that to continue growing?

Well, that really depends on -- the regulations has not been finalized. It has the -- that we are not allowed to do the low documentation, then we will not be able to continue to do that. But as of now, these are very, very strong quality credit that we provide to these borrowers. And we'll continue to do it if that's allowed. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: Okay. And how much of that is the composition of that piece of the portfolio, and how much has been the growth of that?

Most of the growth that we portfolio -- is that your question? Most of the growth in the single family is in this low doc [ph] loan-to-value mortgage loans.

Our next question is from Gary Tenner at D.A. Davidson. Gary P. Tenner - D.A. Davidson & Co., Research Division: I had a couple of questions. I guess first on the time deposits, kind of talking about that as a way of managing some costs next year. Could you go through the maturity schedule over the next several quarters? And also tell us what your current posted rate is for CDs.

Gary, for our CD customers, generally, the duration is very short. For most, it's 6 months to $1 billion. So in every quarter, we have a couple of billion that come up for maturities, overall with the opportunities. And I think on the posted rate -- our posted rates are obviously, it varies, depending on kind of a –- the duration of the CD. But they're pretty competitive with the Chinese-American banks. Gary P. Tenner - D.A. Davidson & Co., Research Division: Well, I guess what I'm trying to get to is I mean, with the current CDs at 80 basis points, they're pretty short, that would suggest there's maybe not a ton of opportunity to reduce those costs more. Is that fair or is there more room for the [indiscernible].

Well, there's still some that were higher rate. There's still some, quite frankly, that were an exception price. So there still is some opportunity. I would say compared to our ability to reduce it, let's say a year ago, the reduction is going to be less. But obviously, it still makes an impact. And then also not only the absolute costs in the CDs, but the movement away from kind of growth in CDs and movement to a more low-cost deposits. That will help the overall cost of deposits as well. Gary P. Tenner - D.A. Davidson & Co., Research Division: Okay. That helps. And then just a couple of line items on the expense side, and if you've mentioned these, I apologize. But the comp line was down I think a couple of million dollars sequentially and then legal and consulting costs were both a fair bit sequentially. Could you comment on those?

Yes, sure. On the comp line, it was down, payroll taxes were down a little bit, and then also the deferred loan fees were up a little bit. It was just the offset the comp because we had more production. On the legal, I would -- the reason for the increase quarter-over-quarter, there was a $4 million amount that we accrued for a judgment kind of a -- against us.

[Operator Instructions] And our next question comes from Mike Turner at Compass Point. Michael Turner - Compass Point Research & Trading, LLC, Research Division: Just a follow-up on expenses. I mean, you've been doing a very good job of holding the line and really keeping expenses flat despite all the strong revenue growth. As we look into next year, what's your thought there? Will you be able to continue to do that? Will kind of credit cycle costs offset normal inflationary pressures or any thoughts there?

Yes. Mike, at this point, I would say when we look at 2013, we definitely think that the credit cycle cost will more than offset kind of the inflationary pressures of the core expenses. It's still very high, and one thing I think is hard to really see in that, a lot of the credit cycle costs are still related to the covered loans. Although 80% of that is a reimbursable from the FDIC, 20% of $20 million, $30 million is still quite substantial. So as those loans kind of work through the process, as we have less and less problem loans because we’ve already worked through them, that the overall cost -- credit cycle cost, which for us are largely embedded in the line item, loan-related costs, REOs, which is -- REO expenses, which is ongoing expenses also write-downs on REOs and legal cost, we expect that to go down quite a bit next year, and then in 2014, even more so. Michael Turner - Compass Point Research & Trading, LLC, Research Division: Okay. And you said that -- I guess I can back into the math, is about $20 million to $30 million a year net.

Yes. It depends because fourth quarter, it could vary obviously. Michael Turner - Compass Point Research & Trading, LLC, Research Division: Yes, okay. And then also just on the interest income on the covered loan portfolio, I mean it looks like it will probably come in a little North of $300 million or so this year. I mean, what's the sort of trajectory for that as we look out to next year? I know it's really kind of got an effective yield of 8% or 9%.

It will continue to go down as you see that the payoff is sometimes could be fairly substantial. So you'll see that dollar amount will continue to drift down. As the portfolio decreases and over time, there will be less accretable income. So the combination, it will come down.

But, as Julia mentioned, when we're looking at 2013, we are looking at total net growth in the loan portfolio of 5%, so we hope that, that will help offset.

[Operator Instructions] The next question is from Julianna Balicka with KBW. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: I wanted to ask a little about fixed and floating rate originations in your current loan portfolio. What is the breakdown of your loan portfolio between fixed and floating rate loans? How much of those have already turned over to the lower rate environment versus still hanging out at maybe some historic higher rate? And of your new originations, what's the fixed and floating breakdown?

We don't have that exact dollar amount, and that would be shown in the Qs, right, in terms of the repricing. But in general, a lot of our loans are C&I -- about all floating on the commercial real estate, some of them may still have a few years, but very short. If we offer fixed intermediate, maximum is 3, 5 years. Same thing with the single family. So all in all, I think that our duration on the loans are pretty short too.

I think we -- again, this is something about from an East West Bank's perspective, we're really trying to be very prudent in terms of not taking much interest rate risk. Now for the last few years, we intentionally stay short. We intentionally also have low yield investment securities that are -- that were short just to make sure that we do not get ourselves in trouble by, I mean, going long on investments or maybe going long on commercial real estate or going long on residential mortgages, and then getting caught when rates start going up. While interesting enough, we've been waiting for the rate to go up, it never did. So continually, we were wrong. But the nice thing about being wrong was that we have record earnings every year, while we were wrong. So -- and I think we're going to continue to stay in the same position. The market today, in terms of competition, what we found is that particularly in real estate, less so in C&I because it's hard to structure a C&I loan for like 10 years or 15 years. But when it comes to commercial real estate or single-family mortgages, we found that many of our competitors are now putting in 15, 30 years, single-family mortgages and putting the portfolio or maybe commercial real estate of 10 years, put into portfolio and at the very low rate. And I think that, that is just going to be a very slow ticking time bomb. The reason I say it's a very slow ticking time bomb is assuming that Fed is not going to raise rate, until after 2015. But after that, if the U.S. economy eventually start having some momentum and rate needs to start going up. I think a lot of these banks sitting on those type of loans who are never going to be refinanced because of such a low rate. Is going to have some challenges. So from our perspective is that the good news is that, we'd rather see a margin compression, a manageable margin compression as long as we know that we can still grow quality earnings. So one of the things that we looked at, is the opportunity that come from East West is that besides managing the margin as well as we can, so recognizing the market is such that you cannot have it both way. That is that, if we wanted to stay on 4% plus, we're going to have to take a substantial amount of interest rate risk. And we look that as a credit risk is already a big, big thing that we need to focus on, and we rather not take too much interest rate risk. So in that perspective, so we'd rather let the margin drift down a little. And still, I think that even if we come down as we expected the next year bottom of 3.8 still substantially better than most of the banks in this country, anyway. And then what we wanted to do is to make sure that we look at, "Okay, can we grow the volume? Are there enough market share that we can take? Are there enough business that have something to do with U.S. and China that we have a high likelihood that we're getting the opportunity to bank these kind of transactions and customers? And on top of that, fee income area. All of the areas that we think that there are opportunities for us to expand and can get more and plus managing the expense better with the credit cost also coming down and so forth. All-in-all, together, we think that we can grow quality earnings 2013 and beyond in a nice way. And still going to end up getting sort of like earnings per share growth, get us to record earnings, but not having to put too much egg in the basket in terms of something that's uncontrollable by East West Bank, which is interest rate direction. So you will be able to see that going forward, we'll continue to stay relatively short even these no doc loans that we're doing in residential, most of them are at 3 to 5 years term. So we are, in that perspective, most likely not going to have much of an interest rate risk there.

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

Well, I want to thank everyone for joining us to today's call, and I look forward to talk to you all in January 2013. Bye bye.

The conference has now concluded. Thank you for attending today's presentation. Please disconnect your lines.