East West Bancorp, Inc. (EWBC) Q1 2013 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, Principal Accounting Officer of East West Bank and Executive Vice President of The Bank

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division Joe Morford - RBC Capital Markets, LLC, 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 David Rochester - Deutsche Bank AG, Research Division Gary P. Tenner - D.A. Davidson & Co., Research Division Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division Matthew T. Clark - Crédit Suisse AG, Research Division John G. Pancari - Evercore Partners Inc., Research Division Michael Turner - Compass Point Research & Trading, LLC, Research Division

Good morning, and welcome to the East West Bancorp First Quarter 2013 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 2013. 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, 2012. 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 this morning for our earnings call. Yesterday afternoon, we were pleased to report financial results for the first quarter of 2013. East West reported solid earnings of $72.1 million or $0.50 per diluted share, for the first quarter. We increased first quarter earnings by $4 million or 6% and increased earnings per diluted share by $0.05 or 11%, from the prior year period. Following our third consecutive year of record earnings in 2012, we continue to demonstrate solid financial performance in the first quarter of 2013. This financial performance is driven by continued healthy growth in our loan and core deposit portfolios, improvements in credit quality and reductions in operating expenses. Our operating results of $72.1 million marks the eighth consecutive quarter we have increased both net income and earnings per share, resulting in a strong return on average asset of 1.3% and return on average common equity of 12.45% for the quarter. Quarter-to-date, we grew loans, including covered and non-covered loans by $285.1 million or 8% on an annualized basis. The loan growth was fueled by increases in non-covered single-family loans of $147.6 million or 27% annualized; non-covered commercial real estate loans of $110.4 million or 12% annualized; and non-covered commercial and industrial loans of $49.5 million or 5% annualized. The first quarter growth in non-covered commercial and industrial loans was less than the approximate $500 million increase in the same category for the fourth quarter of 2012. However, as discussed in the earnings call last quarter, a reduction in the growth for the first quarter of 2013 was anticipated, as there were many loans originally planned to be booked in the first quarter of 2013 ended up closing earlier right before year end of 2012. On the deposit front, in the first quarter of 2013, we continue our focus on attracting low-cost core deposits. As of March 31, 2013, we reached record levels of both total deposits and core deposits of $18.9 billion and $12.9 billion, respectively. Our ongoing effort to increase profitable, low-cost commercial deposit relationships has continued to be successful and the strong growth in core deposit was fueled by an increase in noninterest-bearing demand deposits. As of March 31, 2013, we had $4.8 billion in noninterest-bearing demand deposits, the highest ever in the history of the bank. The growth in core deposits contributed to a reduction in the cost of deposits from 40 basis points from the fourth quarter to 37 basis points for the first quarter of 2013. 2013 marks the 40th anniversary of East West Bank. And throughout our history, we have consistently performed well and outperformed our peers, even in challenging operating environments. Although the low interest rate environment and slowly recovering U.S. economy continue to pose challenges for revenue growth in the industry overall, East West continues to perform well and outperformed many of its peers, with higher growth, profitability and returns to shareholders. Further, with our strong capital base and solid earnings, we're able to provide a strong return to shareholders year-over-year. We have increased tangible book value by 10% to $13.66 per share as of March 31, 2013. Also during the first quarter, we increased the quarterly common stock dividend to $0.15 or a 30% dividend payout ratio, and repurchased $87 million of our common stock. Looking forward to the remainder of 2013, we have a strong loan pipeline, credit quality continues to improve and we are confident that we will be able to continue to produce solid earnings quarter after quarter. With that, I will now turn the call over to Julia to speak in more details about our key successes for the first quarter of 2013.

Thank you very much, Dominic, and good morning to everyone. I would like to spend a few minutes discussing the loan growth we experienced during the first quarter of 2013, and then discuss the net interest margins and our expectations for the future. Finally, I will review the guidance we provided in the earnings release yesterday for the second quarter and the remainder of 2013. In total, our loan portfolio increased to a record $15.4 billion at March 31, 2013, an increase of $285.1 million or 2%, from December 31, 2012. Non-covered loan balances excluding loans held for sale increased 3% or $416.2 million from December 31, 2012. As expected, covered loan balances decreased from year end, a reduction of $183.3 million or 6% quarter-to-date. Overall, our ability to grow our total loan portfolio quarter-after-quarter stems from our strong pipeline and origination channels across multiple business lines. We have consistently been able to derive strong loan growth from single-family loan originations from our retail branch networks and both commercial real estate and commercial and industrial loans from our commercial lending offices. Our single-family loan portfolio grew $147.6 million or 7%, in the first quarter of 2013, a continuing of strong demand we have experienced for the past several quarters. During the first quarter of 2013, we originated about 650 loans, totaling $265 million, with an average loan size of $400,000 and an average loan-to-value of 56%. Our single-family loan originations are all 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 ratios. Historically, the credit quality for our single-family loans has been outstanding regardless of relative cycles, and we attribute this largely to the high down payment requirements. The pipeline and demand for single-family loans remains healthy and we expect to continue to see strong originations throughout the remainder of 2013. Additionally, we experienced good growth for commercial real estate and commercial and industrial loans, which increased by $110.4 million or 3%, and $49.5 million or 1%, respectively. As Dominic mentioned, the growth in the commercial and industrial loans for the first quarter of 2013 was lower than the fourth quarter. However, for this sector as well, we have a very strong pipeline and expect to see stronger growth in the second quarter and for the remainder of 2013. Although the growth in the non-covered portfolio is offset by expected reduction in the covered loan portfolio, at this point, we believe that we can grow the total loan portfolio by $200 million each quarter for the remainder of 2013 or approximately 6% for full year. Next, I would like to spend a few moments discussing the net interest margin and net interest income for the first quarter and our expectation for the remainder of 2013. Net interest income adjusted for the net impact of covered loan dispositions totaled $184.6 million for the first quarter of 2013, a decrease of $13.8 million from $198.4 million in the prior quarter. The decrease in the net interest income quarter-to-quarter was largely due to the lower accretable income on loans accounted for under ASC 310-10. As discussed in the prior earnings call, this can vary quarter-to-quarter depending on the cash flow activity that has occurred. However, given the smaller price of the covered loan portfolio and the net accretable income remaining, we do expect that the benefits to our net interest income will be reduced for the remainder of 2013 and over time. The core net interest margin, excluding the net impact to net interest income of $24.7 million resulting from covered loan activities and amortization of the FDIC indemnification assets, totaled 3.62% for the first quarter of 2013. This compares to a core net interest margin, excluding the net impact of interest income of $46.5 million resulting from covered loan activity and amortization of the FDIC indemnification asset, of 3.84% for the fourth quarter of 2012. The decrease in the core net interest margin and net interest income for the first quarter of 2013 compared to the fourth quarter of 2012 is due to the decrease in accretable income from covered loans and the continued downward repricing of the investment securities and loan portfolios as a result of the extended low interest rate environment. On the funding side, we continue to actively take opportunities to reduce our overall funding costs and higher-cost time of deposits. The cost of funds decreased 4 basis points to 60 basis points in the first quarter of 2013 from 64 basis points in the fourth quarter of 2012, largely due to the reduction in the cost of deposits from 40 basis points in the fourth quarter down to 37 basis points for the first quarter of 2013. Lastly, I would like to provide a brief summary of our guidance for 2013. As in the past, in our earnings release yesterday, we provided guidance for the second quarter and full year of 2013. Yesterday, we reaffirmed the guidance provided earlier in the year and we estimate that fully diluted earnings per share for the full year of 2013 will range from $2 to $2.04, an increase of 6% to 8% for $1.89 for the full year of 2012. For the second quarter of 2013, we estimate that fully diluted earnings per share will range from $0.50 to $0.51 per diluted share. With that, I would now like to turn over the call over to Irene to discuss the first quarter 2013 financial results in more depth.

Thank you very much, Julia, and good morning to everyone. I'll spend a couple of minutes discussing the financial results for the first quarter of 2013, specifically as it results to credit quality, noninterest income and noninterest expense. Starting with credit quality. We're pleased to see that net charge-offs on the non-covered loans were down substantially, totaling only $540,000 for the first quarter of 2013 as compared to $9.6 million in the fourth quarter of 2012 and $10.3 million for the first quarter of 2012. Additionally, the total nonperforming assets, excluding covered assets, to total assets ratio has been under 1% for over 3 consecutive years, with nonperforming assets of $159.5 million or 69 basis points of total assets, as of March 31, 2013. Nonperforming assets increased 13% from December 31, 2012, largely due to an increase in nonaccrual loans. The increase in nonaccrual loans was released specifically due to one C&I loan, which matured and was delinquent as of March 31, 2013. We expect full payment of both principal and interest on this fully collateralized loan and expect it to be resolved in this coming quarter. For the first quarter of 2013, the company recorded a reversal of loan loss provisions for non-covered loans of $762,000 as compared to a provision for loan losses of $13.8 million and $16.5 million for the prior quarter and prior year periods. East West continues to maintain a strong allowance for non-covered loan losses of $228.8 million or 1.85% of non-covered loans receivable, as of March 31, 2013. The reduction in the provision for loan losses and the allowance for loans ratio is due to better credit quality, with resulting improvements in risk ratings for loans and reduced net charge-offs. During the first quarter of 2013, the company also recorded a provision for loan loss of $3.1 million uncovered loans outside of the scope of ASC 310-30 and $2 million uncovered loans within the scope of ASC 310-30. As these loans are covered under loss share agreements with the FDIC for any charge-offs the company may incur, the company records income of 80% of the charge-off amount in noninterest income as a net increase in the FDIC receivable, resulting in a net impact to earnings of 20% of the charge-off amount. Overall, we expect credit quality to continue to improve and estimate that the provision for loan losses will approximate $2.5 million to $5 million per quarter for the remainder of 2013. Moving on to noninterest income and expense. East West reported noninterest loss for the first quarter of 2013 of $2.1 million, an improvement from noninterest loss of $18.5 million in the fourth quarter of 2012 and a decrease from noninterest income of $21.7 million in the first quarter of 2012. This improvement of the noninterest loss from the prior quarter and the decrease from the noninterest income for the prior year is primarily attributable to changes in the net reduction of the FDIC indemnification asset and FDIC receivable. In total, fee income, including branch fees, letter of credit and foreign exchange income, loan fees and other operating income totaled $24 million in the first quarter of 2013, a decrease from prior quarter but an increase from the prior year period. The decrease in fee income during the first quarter of 2013 as compared to the fourth quarter was largely due to decreases in loan fees and fees earned on interest rate swaps entered into by our customers. In the fourth quarter, we had experienced higher-than-expected fee income from both loan fees that were nonrecurring in nature and higher volume interest rate swaps entered into by our customers. Moving on to noninterest expense. Total noninterest expense for the first quarter, excluding amounts to be reimbursed or payable by the FDIC, and prepayment penalties on FHLB advances, decreased to $96.4 million or by 2% from the fourth quarter of 2012 and by 5% from the first quarter of 2012. This decrease was largely due to lower credit cycle costs. Credit cycle costs, which include REO expense, loan-related expense and legal expense, decreased to $7 million for the first quarter of 2013 as compared to $12.5 million for the fourth quarter of 2012 and $22.5 million for the first quarter of 2012, which are included in noninterest expense. Finally, as stated in the earnings announcement released yesterday, East West Board of Directors has declared second quarter dividend on the common stock and Series A Preferred Stock. The common stock cash dividend of $0.15 is payable on or about May 13, 2013, to shareholders of record on April 26, 2013. The dividend on the Series A Preferred Stock of $20 per share is payable on May 1, 2013, to shareholders of record on April 13 -- excuse me, 15, 2013. Yesterday, we also announced the mandatory conversion of all Series A Preferred Stock as of May 1, 2013, at the option of the company. This Series A Preferred Stock will be converted into approximately 5.6 million shares of common stock at a conversion ratio of approximately 65.13. I'll now turn the call back to Dominic.

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

[Operator Instructions] Our first question comes from Jennifer Demba at SunTrust Robinson Humphrey.

Two questions. One, can you just talk about the source of your commercial loan growth this quarter by industry, your niche? And then secondly, obviously, you've experienced more net interest margin compression than we were probably guessing you would. I'm just wondering what you foresee in the future as the offset to that pressure as we go forward, whether it would be from a revenue or expense side or credit cost side.

Jenny, so when we look at kind of the C&I loan growth, I think that was the first question that you had, it's pretty mixed in different industries. We had some good growth as far as some kind of -- in the industries of entertainment, also some trade finance areas as well, but really -- and in, also, a little bit of manufacturing as well. So it's pretty well diversified. Granted, obviously, we had talked about this before, there was such a pull forward in December. The net increase of only about $15 million is lower than in the past. But if you compare that along with the increase we had in the fourth quarter, overall, the growth is there.

And in terms of the NIM, eventually, this strong loan growth to replace the excess liquidity from investment securities to loans will eventually produce the higher net interest income, so, yes.

And this quarter compared to last quarter, even with the reduction, a lot of it really had to do with less accretion compared to the fourth quarter. We talked about that in the call last quarter as well, that we had more accretion than we had anticipated.

Our next question comes from Joe Morford at RBC Capital Markets.

I guess, first, just was curious if your 2013 guidance of $2 to $2.04 includes any of the savings from the preferred stock conversion.

No, because the preferred is just dividends below the line. Yes, and the EPS are already included in the conversion. So there's very little impact on the EPS.

But you won't have a preferred dividend in the second half of the year. Is that correct?

Yes.

The share count is already included in our diluted share count.

Right. Okay. And then the other question is, I guess, looking at the outlook for $200 million of growth on a quarterly basis, assuming kind of the continued runoff in the covered portfolio, the current pace suggests that the growth in the non-covered portfolios maybe now expected to be in the low double-digit range versus the high single-digit range that you'd talked about previously. And is that right? And if so, what's driving that increased confidence now?

Yes. We do think that the $200 million increase per quarter is very doable. We see a pretty strong pipeline, and that's why we are comfortable. And across-the-board, the C&I, commercial real estate, single-family, so we feel pretty comfortable with our guidance of $200 million net increase per quarter.

Our next question comes from Aaron Deer at Sandler O'Neill. Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division: Just wondered if you could -- if you have any sort of update that you can provide on how you've been thinking about the new qualified mortgage rules. I know this was discussed a little bit on the prior quarter call. And if you have given any thought to how you might evolve your existing residential mortgage product to meet your customers' needs?

Well, so far, I mean, obviously at this point, we continue to get updates from CFPB. And we feel pretty confident that, I think, what we're doing right now is most likely going to be okay going forward. I think that their regulation is evolving and we can also adjust to whatever the final regulation, whatever the rule is. We have good conversation at CFPB so far and everything seems to be going -- moving along just fine. And we have every reason to believe that we will be able to continue to serve this population of customers, which is really important because not only many of those first-generation immigrants who have hard time to get credit from other traditional bank that requires many years of financial information and so forth. But on top of that, I think that as we have indicated throughout these different calls, that our loan-to-value stay at right around the 50th percentile. And we hardly ever had any losses from this portfolio. So we will continue to make sure that we will do everything we can to provide this type of product and service available to that segment of population. Aaron James Deer - Sandler O'Neill + Partners, L.P., Research Division: That's great. And then it sounds like you're pretty confident about the pipelines and the outlook for loan growth. Is any of that strength coming from the Greater China market? Or is that still a pretty modest contributor to the originations?

Yes. The Greater China will always going to be modest for the fact that our strategic direction have always been leveraging our know-how knowledge and expertise about U.S.-China trade investment and then so forth to attract business, mainly in U.S. So a good example will be there will be a lot more business we do with Chinese company from China, who are making acquisition in U.S. or who are actually starting their new business in U.S. And there are also new immigrants from China who will establish their new homes in the United States. And that's why we actually were able to do a lot of residential mortgages for these newcomers, who are putting substantial amount of down payment for acquiring home, acquiring commercial real estates, acquiring apartment buildings. So you've got that segment going on, and then you have this international trade. There are traditional import customers here, and then also are expanding export customers that we are having more and more of the U.S. companies, whether they are from various industries that are exporting their goods to China. So we will continue to focus on this type of business. Now the great thing about it is that we are also -- have the capability and capacity to originate loans either in U.S. dollars or in Chinese currency in China. And also, of course, we have the Hong Kong branch. And having that flexibility and allow our customers in U.S. that do business in China, they can have accounts open in Hong Kong office or maybe in our Shanghai office. And in the same way for these Chinese companies, who are now doing business in U.S. to have their accounts transferred from our Shanghai branch to our either Los Angeles or Boston or Atlanta office. It just makes life so much easier for them. But there was never once that we had a strong desire to sort of conquer the China market. That's why we are not there to open retail branches and we are not there to look into whether it's debit card or credit card business for the retail customers. We are not there making -- originating mortgage loans to the Chinese home buyers. And that's just not the kind of business that we are interested to do. We are very much interested into our specific niche, which as of today, there really isn't too many banks in the U.S. who are so exclusively focusing in this direction. We feel that there will be plenty and plenty of business from high tech to clean tech, from agriculture to aviation and from the traditional manufacturing, trade, real estate, hospitality, et cetera, et cetera. There's going to be a lot more of those kind of business going on between U.S. and China. And we think there are plenty of those that will be available for us to take because apparently, as of today, even our competition, either they are not interested or they don't know enough about it or, if they do, they are only looking at it as a minor element of their focus and, therefore, just cannot get good at it. And this is something that we are going to continue to focus on. And I think that's the reason why it's driving business to us, even though, overall, U.S. economy is relatively slow at this point.

Our next question comes from Brett Rabatin at Sterne Agee. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: I wanted to get a little more color, if I could, around just loan origination rates and the various portfolios, kind of the bottom line I was hoping to get maybe to get where your average origination was for the portfolio in the quarter. Or if you want to do it from more of a bottom line perspective, what you're doing in terms of C&I and commercial real estate production.

Average new origination is close to about 4%. Some of them are higher, the single-family around 4.5%. And then commercial real estate, C&I, I think some of them are close to 4% or high 3%. So I would say that, that's about the new originations, our incremental yield. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: . And then in terms of the commercial real estate, especially, has the competitive landscape changed with the real estate market in Southern California? And where is the commercial real estate growth coming from?

Well, I think that in terms of commercial real estate, from a banking industry point of view, there are a lot more competition and pricing is getting challenging simply because many of the smaller community banks finally get out of the MOU or C&D. And the first line of business that they're comfortable to work on usually are commercial real estate. So we're seeing more of that coming up. And then in addition to that, I mean, larger banks that -- these big banks that in the past had not been interested in small commercial -- smaller commercial real estate are now also jumping into this, the hunt for commercial real estate. Our advantage that we have is that, as I talked about it earlier, when we have some pretty interesting exclusive relationships with some of these customers, let's say, from China or Southeast Asia, looking into opportunities of acquiring some good assets in U.S., many of them because of our assistance, they are very much interested to look at East West as the exclusive lender to help them. So in that regard, we do not have to be out there like putting out a bid against 10 other banks, and then see which one is cheaper. And the second thing is that helping our long-time Southern California or even Northern California customers to acquire commercial real estate in a competitive environment. Many of our loyal customers wanted to rely on a bank that will come through for them. That is that if they have a 30 days' escrow or if they have a 25 days' escrow that they need to close, they need the bank to come through. So as much as there are maybe 10 different bids out there from different banks, they all want to be in this space and willing to go much lower price, et cetera, et cetera, many of these banks may not necessarily have the credibility. They may be able to perform, but I mean -- but it takes our borrower to feel comfortable to take that risk. And many of them are just not comfortable to take that risk. They'd much rather deal with East West because East West has been with them for many years. So I think to that regard, I think you can look at we do have a pretty sizable commercial real estate portfolio, which equates to sizable commercial real estate customers. And many of them actually are pretty pleased with our services. So therefore, when they start getting active into making acquisitions, invariably they come to us first. So we always are going to get our share of the business. In terms of like a very dramatic role, no, because it's not like we are out here and trying to kill everybody in terms of capturing the market share. We just want to make sure we continue to maintain and get out our fair share. And so far, we've been doing that.

Our next question comes from Herman Chan at Wells Fargo Securities.

What are your expectations for balance sheet growth over the next few quarters? It sounds like the balance sheet growth with increased liquidity in Q1 was greater than maybe your initial forecast.

It would be stable. The balance sheet growth will only come if we have a major increase in deposits. But otherwise, it will be pretty stable, and then we're just redeploying the excess liquidity from investments to loan portfolio.

Got it. And I'd like to get some color on loan originations throughout the quarter. Did you see some more activity from an origination standpoint as the quarter progressed? We hear from banks, saw a greater level of activity in the March time frame, relative to earlier in the quarter.

Yes. Herman, we experience that as well, especially with kind of the surge that we had in December. January was a little slow, and it picked up throughout the rest of the quarter.

The next question comes from Dave Rochester at Deutsche Bank.

Just on the provision, you mentioned a lower provision level going forward, but it sounds like you expect to be growing the loan book pretty decently. So I was just wondering what your all-in reserve ratio was on that new production, if it's generally over 1%, maybe like a 1.2% or a 1.3%?

I don't have that exact ratio. But I would say probably it's still over stable, a little over 1% still at this point in time. The thing is, overall, charge-offs have come down, our loss rates have come down and also the risk ratings on the loans have improved. So what you're having is a situation where we're moving out like a substandard loan, hypothetically, into 20% kind of loss rate and put on then a past loan 1%, a little over 1%. So that's where that dynamic is coming from.

So if you're reserving for new production at that 1%, then maybe 1.1% type level, I guess, the reserve ratio itself could bottom out maybe a little higher than that because you may have still some classified stuff in there as well?

Correct, yes. It will be higher then. And what we have seen is real estate values across the board, whether it's commercial real estate, multifamily, single family, has really firmed up and increased. So we don't expect much charge-offs from the real estate portfolio. As you know that we have been very aggressive in charging off to the most recent appraisal. So hopefully, we won't have much charge-offs coming from the real estate portfolio going forward.

Right. Got it. And on the resi portfolio, can you talk about where most of that growth came from? Was it new home purchase volume in Orange County or L.A. that primarily drove that?

Yes, mostly in California, but in California, Northern California, and mostly home purchases.

Okay. And just one last one. Is there any thoughts to reloading a buyback before year end potentially, depending upon what growth is and what the market is doing?

Well, at this time, we have that $200 million authorized and we have $120 million remaining, so we'll finish that, and then we'll see how the market and we'll have the discussion with the board if we want to increase that or not. But at this time, we'll continue with our program to finish the $200 million authorized buyback.

And do you guys have an internal target for Tier 1 common or maybe total risk-based capital that you want to manage to a longer term in terms of ratio?

Our internal guidelines is that the total risk base, minimum of about 12.5% so that we have plenty of room against the 10% well capitalized. So most likely, a 13%, 13.5% total risk base would be more than adequate for us. But at this time, we are in excess of 15%, so we have pretty -- have very, very strong capital.

And we want to take a measured approach, too. I think that, that is kind of the level -- obviously, our levels are much higher than at this point. But that doesn't mean necessarily we're going to get down to that, right?

Yes. Well, the other thing is that, as of today, with a very high capital ratio, we're still cranking up like very nice return of equity. So the fact is that's why we can just be very prudent to look at the overall market and have discussion with our board before we sort of, like, take too quick of a move of any kind of a buyback. But that's something that at the end of the day, management and our board are pretty much in alignment with our shareholders and making sure that we got a very decent return for our shareholders. But if there are capital that we do feel that it doesn't make sense to stick around, and then we have plenty of cushion and there is not much potential acquisition in sight, you bet that we're going to return our cash back into shareholders in a decent pace.

Our next question comes from Gary Tenner at D.A. Davidson. Gary P. Tenner - D.A. Davidson & Co., Research Division: I had a follow-up on the question about the provision expense guidance for the year. That's down anywhere from 50% to 75% from the previous guidance, so a pretty significant change. You talked about some of the parts there. But I guess I'm really curious of what you've seen over the last 90 days particularly that led you to reduce the guidance there.

Overall, Gary, I would say the guidance reduction is a function of the improvement that we're seeing in the credit quality. As Julia mentioned, with the real estate portfolio, we're not seeing the kind of continuous reduction in real estate values. In fact, they've improved. We're also not seeing really an increase in problem loans. So when we look at the rest of this year -- and occasionally, something may happen, particularly maybe with the C&I loan because that can happened. Especially with the real estate market and our real estate portfolio, we're not seeing kind of a further decline and deterioration in credit quality. And that really is the driver for the guidance reduction.

Our next question comes from Julianna Balicka at KBW. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: I have a couple of questions. First, in terms of thinking about your core net interest income, excluding accretion, which I believe you have $80 million left to accrete over time, excluding that, when you think about the volume in loan growth and earning asset growth versus the pressure on asset yields, are you thinking about increasing your core NII for the rest of the year? Or are you thinking that this is a flat to down number, and then your increased earnings and/or flat earnings will come from better expenses?

No, we think the NII for the remainder of the year would be flat because the loan growth will offset the slightly decrease in accretion per quarter. But cumulatively over time the NII will increase because of the loan value yielding higher than the investment securities. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: And so just to make sure I heard you correctly, you think that the loan growth will offset the decline from repricing and accretion?

We think about stable, yes, for the remaining of the year, the $184 million NII. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then secondly, kind of going back to the balance sheet growth question that was asked a little earlier, your deposit growth continues to be good. So in terms of what you're thinking about, your internal assumptions on your ongoing deposit growth for the rest of the quarters, are you thinking -- what kind of growth rate are you building in?

We're expecting very small growth. So the last couple of quarters, we experienced a very, very high growth in the deposits, but I think that should be moderating. There will be some runoff on the deposits that like for people to pay property tax, income tax and just the fluctuation, but we'll have some increase. We don't expect that the deposits will grow that much for the remainder of 2013.

Our next question comes from Matthew Clark at Credit Suisse. Matthew T. Clark - Crédit Suisse AG, Research Division: First, on the loan yields, can you give us a sense for, I think, on the non-covered loan yields side, they were up in the fourth quarter a little bit. Can you just give us a sense for what may be unusual items might have been in the fourth quarter, and if you strip them out, what the trend in loan yields look like for this quarter?

Yes, Matthew. This is Irene. When we were on the call for last quarter, we mentioned there was kind of unusual item for our China portfolio on the -- which is part of the non-covered portfolio. That's why the yield went up in the fourth quarter, especially if you compare it to the third quarter, too, because in this kind of environment, it's unusual to see an increase. So the impact of that was probably about $5 million for the fourth quarter. So if you factor that in, the kind of reduction from the fourth quarter to the first quarter, it wasn't as severe as it looks from a GAAP reporting perspective. Matthew T. Clark - Crédit Suisse AG, Research Division: Okay. So the pricing pressure may have eased, I guess, 1 quarter?

And that's something we are definitely seeing with the loan portfolio. Granted given the extended low rate environment, loans are repricing downwards, but the repricing is -- the impact of it is less and less. Matthew T. Clark - Crédit Suisse AG, Research Division: Okay. And on the provisioning, calling for about $10 million to $20 million, I guess, this year, I think most were probably looking for $35 million. Is that something that you think might be sustainable as we get into 2014, given that credit continues to improve?

Yes. That's what I would say, that, that's likely. Matthew T. Clark - Crédit Suisse AG, Research Division: Okay. And then finally, on the your SBA loan sale front, can you just talk about that business and when we might see you guys start to take some gains, maybe next quarter into the second half to help fees?

I'm sorry, which loan sale? Oh, SBA. That's something that we may take a look at. We have pretty good origination in SBA. But that's something we'll evaluate next quarter or this quarter.

Our next question comes from John Pancari at Evercore Partners.

Back on the QM topic, didn't you indicate last quarter that the low-doc, no-doc loans are going to be prohibited by the regulators from being originated at all after January 2014?

Well, as the regulation come out, it will be a non-QM, if you don't follow all the income, set to income and the verification. But like it's not -- we are following, but it's not prohibited, but it will be a non-QM.

Nonqualified mortgage. Yes, nonqualified. So there are certain criteria you have to make in order to qualify. Obviously, to qualify as a qualified mortgage from the TDSP standard. Anybody can make a loan, but it can be either be qualified or nonqualified. So at the worst-case scenario, we will be a nonqualified.

Okay. Now that helps clear it up because we just wanted to see if it is going to still be permitted in any fashion, but just not qualified. Okay, that's helpful.

That's correct. Yes.

Okay. And does that -- being that it's not going to be qualified, I know that should not impact you too much because you're going to be putting this paper on your own book as you have been. But does that impact at all the cost of origination, the legal cost that you need to factor in or the pricing or even the reserves you take on this going forward? In other words, to sum it up, does it impact the profitability of this product at all?

Well, not in a significant way, in terms of the additional cost. But the risk would be that somebody can come back and say this is not affordable, this is -- because it's non-QM. So it's something that we have to consider what kind of risk that we are taking on that non-QM.

Yes. I think normally, I think if you take a -- just look at it as a hypothetical situation. Someone puts 5% down and bought a home because whether the builders or maybe the brokers or maybe the bank, they kind of talked them into such a sweet deal and then they're guiding to it. And later on, the price came down or maybe they lost their job or whatever, they say, "You know what, I should have never bought this house. I want to get out of it." If you are nonqualified, from a legal point of view, you're in a much weaker position from a CFPB position. Our customer normally puts 50% down to buy a house. And I don't know under what circumstances a person want to put, let's say, $500,000 to $1 million home and then 6 months later, decided that this is -- I got the wrong mortgage. And so I think those are the kind of things that, on one hand from a legal point of view, it sounds -- from a theoretical point of view, it may sound like, well, there may be a lot of risk. And then quite frankly, to a lot of lenders, there's a lot of risk because they specialize in very low down payment mortgages and with a lot of heavy underwriting on documents, like tax returns, financial information. We're predominately focusing on how much cash down that person put in, and we're predominately focusing on purchase, and also purchase for not investors, not investor buying 5 homes, 10 homes. We focus on helping an investor to buying a home as a primary residence. And in general, how on earth somebody who just sunk in that much of a down payment to do get that true American dream, and then somehow wake up one day and say, "You know what, I want to move out of here and give that loan back to East West Bank." And it's just something that -- and then if they do, what's the damage? And then still going back to that, so if they do, what is the damage? So we get our loan back. Well, everyday, there are people refinancing. So I don't see there's much issue much at all. So it is one of those things that I know that, in general, that may be very applicable to a lot of banks. From an East West point of view, we do run into a very different kind of direction, just like our focus on U.S.-China business or our focus on these type of mortgages. And so that's why we feel pretty comfortable that one way or the other, we're going to be fine.

Okay. And that's helpful. And then lastly, on the margin, can you just remind us what surprised you when it came to the margin results for this quarter? I think you indicated that was mainly around the covered loan yield. Is that primarily where you were surprised? Or was there greater compression in the non-covered book than you thought you were going to see when it comes to loan yields?

A couple of things. We did have a little bit -- we did expect more accretion because we have had more accretion every quarter for the last few quarters so that was a little bit of a surprise. Additionally, we did have an increase in the average earning assets due to the increase in the liquidity. So those 2 are kind of what has impacted the drivers from the decrease in the NIM compared to our guidance.

Yes. The accretion is predominantly, obviously, is on the FDIC covered loans, the UCB acquisition loans. And that can fluctuate up and down, and it's hard to predict. In fact, it's quite a miracle for the last 2 or 3 years that we somehow have not seen much too big of a fluctuation that vary from our expectation. And I think that this may be one of the very few isolated quarters that we actually had an expectation of certain dollar amount of accretion. But the activity in these FDIC covered loans has been such that simply do not give much accretion and, therefore, I think, threw the margin off a bit, in addition to the excess liquidity coming from significant amount of deposits coming in due to the various reasons. And so with that, the excess liquidity obviously, with us -- I mean, generating, yielding asset at like a 1.5% or so for these investment securities, obviously, have put their margin down a little bit. And I think that the likelihood of this type of unusual exception in the accretion may not be as high going forward.

[Operator Instructions] And our next question comes from Mike Turner at Compass Point. Michael Turner - Compass Point Research & Trading, LLC, Research Division: If we stay in this low-rate environment, say, for another year, 1.5 year, what are your thoughts on refinancing your repo funding?

Well, because of the prepayment penalty and the optionality, it's quite expensive, so most likely, we would not be -- this is on the repo, right? This is on the liability, on the repo liability? Michael Turner - Compass Point Research & Trading, LLC, Research Division: Yes. I think you have about $900 million or almost $1 billion worth...

I think that would be too expensive.

It's a payoff. But there are ones that over the course of the last few quarters we have restructured, Mike. But I can walk you through the details of that. But Julia is mentioning the payoff, and that is something probably we're not going to do.

Our next question comes from Brett Rabatin at Sterne Agee. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: I just had 2 quick follow-ups. I was hoping to get maybe a little more color around the expenses going forward in terms of opportunities to lower those, where that might be coming from. And then also Dominic, you talked more positively maybe about M&A last quarter than you had previously. And so I was just hoping to get maybe a really quick update on how you view the M&A market.

In terms of -- well, I think the M&A market is very positive for our investors from China. But in terms of East West, at this point, I haven't -- I would say that I haven't seen anything in the horizon that would get me overly excited. Well, I think you may heard the comment that I had earlier that we will return our cash back into shareholders soon once we decided that there is not much M&A in the horizon. That is something that we obviously we're on an ongoing basis. We will always have these dialogues with the board and there are always going to be opportunities that were presented to us on a monthly basis from various parties out there in terms of potential acquisitions. And as you have seen so far, we haven't really bought anything for the last 2 years. And at this stage, I would say that, in general, I haven't -- I wouldn't make any comment that there will be anything exciting that we may need to sort of, like, preserve capital to be deployed for some major acquisition. Not at this stage.

And Brett, on your question about the noninterest expense. So overall, we do expect this to trend down with our guidance. Sometimes, some quarters, there is something that happens, especially with the credit cycle costs. But I would say, the increase quarter-over-quarter was largely in the comp and that has to do with the payroll taxes. So that's just kind of evens out over the year. Overall, I would say from a core operating perspective, probably not a huge amount of a reduction throughout the year. But on the credit cycle costs side, we do expect to see some reduction. Brett D. Rabatin - Sterne Agee & Leach Inc., Research Division: Okay. Maybe to ask it another way, if -- let's just assume you're talking about stable core spread revenue, if that becomes difficult to maintain, I guess, I'm looking for anything that you might think about from an opportunity perspective to further lower the expense base.

In the long run, though the credit cycle costs will go down. Even this quarter, we spend, what, $6 million, $7 million coming from some of the problem credits in the past. So that will go down in the future. But it may not be something that, like, it's immediate, yes, quarter-to-quarter. But in the long run for next year, the following year, that should go down.

The next question comes from Julianna Balicka at KBW. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: I have 2 follow-ups, please. Going back to the conversation that we were just having a couple of questions ago about the expected accretion versus what you realized in your NIM guidance. 90 days ago, what was the expected accretion that you were planning for, for the year and for the quarter? And then what was the actual accretion that you realized in your core 3.62% margin? And what is your expected accretion in your current guidance for the year?

I may have to just kind of think about your question because it was so confusing, I didn't expect it. But as of March 31, we had about $80 million left of expected accretion. And as you know, in the past, the actual has been a little bit higher than the expected. The actual in the first quarter was about $20 million. On a go-forth basis, we're tapering that down and expecting $15 million all-in every quarter. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. So in your current guidance for 4.50 -- 3.50% to 3.60%, you're looking at $15 million per quarter accretion for the next 3 quarters?

That's right. Approximately $15 million. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: And 90 days ago, you were looking at $20 million per quarter?

We were looking at a higher number. That's right. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: So that was my question. What was that higher number?

Yes. About $25 million. $20 million, $25 million, it's a bit higher, and tapering down throughout the year. So that's why we had a higher guidance earlier. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. That makes sense. And then the other area that I wanted to follow up with, in terms of your securities gains, how should we think about that on an ongoing basis? I mean, you used to do fairly regularly securities gains, and then you switched to student loans. And so are you switching back to securities gains? I mean, what are your thoughts there?

Our strategy is on the investment securities, especially the mortgage-backed, is it's better to monetize the gain because if interest rates go up, the gains go away. And if the interest rates stay low, there will be a lot of refinancing on that mortgage-backed securities. So based upon that, we think that for this year, if rates stay, most likely we'll try to monetize the mortgage-backed securities. Julianna Balicka - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. And then the pace that you did in terms of gains or is that going to -- I mean, obviously, that fluctuates. But roughly, within this first quarter? Or was this quarter just like a bump or catch-up?

I think that it was roughly about, this quarter, about $5 million gain is what we are expecting.

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

Well, I just want to thank everyone for joining us on the call. And I look forward to speaking with you in July. Thank you.

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