East West Bancorp Inc (EWBC) 2014 Q2 法說會逐字稿

Good morning.

Welcome to the East West Bancorp second-quarter 2014 earnings conference call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Irene Oh, Executive Vice President and Chief Financial Officer.

Please go ahead.

Good morning and thank you for joining us to review the financial results of East West Bancorp for the second quarter of 2014.

Also participating this morning will be Dominic Ng, our Chairman and Chief Executive Officer; and Julia Gouw, our President and Chief Operating Officer.

Second, 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, 2013.

Today's call is also being recorded and will be available in replay format at www.EastWestBank.com.

I will now turn the call over to Dominic.

Thank you, Irene.

Good morning.

Thank you all for joining us this morning for our earnings call.

Yesterday afternoon, we were pleased to report financial results for the second quarter of 2014.

For the second quarter, net income was $84 million or $0.58 per diluted share.

Net income increased $10 million or 13%, and earnings per diluted share increased $0.06, or 12% respectively, from the second quarter of 2013.

Quarter over quarter, we grew net income by $7.2 million or 9%, and we grew earnings per diluted share by $0.04 or 7%.

We achieved strong profitability with the return of average asset of 1.24% and a return of average equity of 12.56%, both of which are higher than the previous quarter.

Overall, it was a strong quarter, achieved with solid growth in both long-term deposits, as well as the expansion of both net interest income and net interest margin.

During the second quarter of 2014, we achieved loan growth of $615.5 million, or 3% from previous quarter, to $20.5 billion, the highest level of loans in the history of East West Bank.

As the bridge between the East and the West, we continue to see increased business opportunities from US-based companies who are expanding into greater China or seeking venture capital and equity investors from China.

These companies rely on East West and our full range of cross-border products and capabilities to meet their banking needs in mainland China and Hong Kong.

In addition, we continue to be the bank of choice for Chinese individuals, investors, and companies who are interested in direct foreign investment in the United States.

Along the strong loan growth, total deposits also inched up, increasing $47 million from the end of March, to a record $22.9 billion as of June 30, 2014.

Core deposits at the end of the second quarter totaled $16.6 billion, increasing $198.7 million from the previous quarter and primarily due to growth in non-interest-bearing demand deposits.

Over the course of last few years, East West has made it a strategic goal to improve the quality of our deposits and our deposit mix.

We have been successful in making progress towards this goal, both in terms of absolute dollar growth and as a percentage of total deposits.

Just over the last two years, we have grown non-interest-bearing demand deposits by $3.1 billion, or 80%; and we have grown total core deposits by $5.6 billion, or 51%.

Non-interest-bearing demand deposits now comprise 30% of our total deposits and increased from 22% of total deposits just two years ago.

We are confident that our success in improving the deposit mix will prove to be invaluable in the coming years, especially in a rising rate environment.

I'm pleased to report that the balance sheet growth we achieved was without compromising profitability.

Both the adjusted net interest income and the adjusted net interest margin increased quarter over quarter.

For the second quarter of 2014, adjusted net interest income totaled $218.4 million, a 4% increase from the first quarter of 2014.

Additionally, the adjusted net interest margin for the second quarter was 3.46%, up 1 basis point from the previous quarter.

Earlier this year, in January, we closed the acquisition of MetroCorp Bancshares Inc., and I'm pleased to report that the full conversion of MetroCorp systems was completed in June.

We're delighted to now be able to offer our newest customers the full range of bridge banking products and services and our expanded branch network in both the United States and China.

In summary, our operating results for the second quarter were strong and reflect strong performance throughout the Bank.

As we head into the second half of the year, we believe that we are well-positioned to achieve another year of record earnings.

With that, I will now turn the call over to Julia to discuss in more detail our key successes in the second quarter and our expectations for the remainder of 2014.

Thank you very much, Dominic, and good morning to everyone.

I would like to spend a few minutes to discuss our balance sheet growth during the quarter and our net interest margin.

Additionally, I will review the guidance we provided in the earnings release yesterday for the third quarter and the full year of 2014, as well as our expectations for the future.

Our total loan portfolio increased to a record $20.5 billion at June 30, 2014, an increase of $615.5 million or 3% from March 31, 2014.

Year-to-date, total loans have increased by $2.5 billion or 14% due to a combination of organic growth and the Metro acquisition, which added approximately $1 billion in loans.

During the second quarter, our continued efforts to grow commercial and industrial loans proved successful with the growth in this sector of approximately $472 million from March 31, 2014.

In particular, we experienced strong growth in the sectors of trade finance, specialty finance, private equity, and entertainment lending.

Additionally, in the continuation of the solid commercial and industrial loan growth in Hong Kong in the first quarter of 2014, total commercial and industrial loans in Hong Kong grew approximately $100 million during the second quarter.

The commercial and industrial loans booked in Hong Kong were largely cross-border trade finance loans.

Along with the strong commercial and industrial loan growth, other areas we have experienced strong growth during the second quarter include noncovered CRE loans of approximately $240.3 million, or 5%; noncovered consumer residential, including single-family and home equity loans of $222 million or 5%.

Originations for single-family and home equity loans picked up in the second quarter compared to the first quarter, and we originated a total of 485 new single-family loans totaling $229.8 million and a total of 674 new home equity loans totaling $244.5 million in commitments.

The credit quality of our of noncovered consumer residential loans continued to be excellent, and as of June 30, 2014, we had less than $7 million in single-family and home equity loans delinquent over 90 days out of a total portfolio of $4.3 billion in outstanding balances.

In continuation of growth trends during the first half of the year, we expect loan growth for the remainder of 2014 to largely be centered in the commercial and industrial loans.

Although the growth in the noncovered portfolio is expected to continue to be offset by the expected reductions in the covered portfolio, we project that we can grow the total loan portfolio by approximately $400 million per quarter for the remainder of the year.

Along with the strong loan originations, our ability to generate strong deposit growth also continues to be very successful.

As of June 30, 2014, total deposits reached $22.9 billion, an increase of $47 million from March 31, 2014.

In the second quarter of 2014, we continued to execute on our long-term strategy to grow low-cost commercial deposits.

Core deposits increased $198.7 million or 1% from March 31, 2014 to $16.6 billion.

Next, I would like to spend a few moments discussing the net interest income and net interest margin for the second quarter and our expectation for the rest of 2014.

Net interest income, adjusted for the net impact of covered loan activity and amortization of the FDIC indemnification asset, totaled $218.4 million for the second quarter of 2014, an increase from $209 million for the first quarter of 2014 and $192.2 million for the second quarter of 2013.

The core net interest margin for the second quarter also increased 1 basis point to 3.46%.

This compares to a core net interest margin of 3.45% and 3.62% for the first quarter of 2014 and the second quarter of 2013, respectively.

The one basis point increase in the core net interest margin and $9.4 million or 4% increase in adjusted net interest income compared to the first quarter of 2014 was largely due to the impact of the interest on our noncovered loan portfolio and the reduction in the cost of the [profits] to 28 basis points.

Lastly, I would like to provide some additional color on our updated guidance for 2014.

As in the past, in our earnings release yesterday we provided guidance for the third quarter and full year of 2014.

We estimate that fully diluted earnings per share for the full year of 2014 will range from $2.29 to $2.33, an increase of $0.19 to $0.23, or 9% to 11%, from $2.10 for 2013.

This EPS guidance is based on the adjusted net interest margin, ranging from 3.35% to 3.4%, an increase from the previous guidance provided based on the stronger than expected loan growth we experienced in the first half of the year.

Further, we have lowered the estimated effective tax rate for the remainder of the year from 32% to 29% due to the purchase of additional tax credits during the second quarter of 2014.

For the third quarter of 2014, we estimate that fully diluted earnings per share will range from $0.58 to $0.60 per diluted share.

With that, I would now like to turn the call over to Irene to discuss our second-quarter 2014 financial results in more depth.

Thank you very much, Julia.

Good morning.

I will discuss our financial results for the second quarter of 2014 in more detail, specifically credit quality, noninterest income and noninterest expense.

Starting with credit quality, the total nonperforming assets, excluding covered assets to total assets ratio, continues to be under 1% as it has been for over four consecutive years with nonperforming assets at $161.4 million, or 59 basis points of total assets as of June 30, 2014.

Nonaccrual loans, excluding covered loans, totaled $118.9 million, a decrease from $132.5 million as of March 31, 2014, largely due to the foreclosure of three commercial real estate loans during the quarter.

For the second quarter of 2014, the Company reported provision for loan loss for noncovered loans of $8.9 million, compared to $8 million for the first quarter of 2014 and $8.3 million for the second quarter of 2013.

Net charge-offs on noncovered loans totaled $7.3 million for the second quarter, compared to $4.1 million in the first quarter this year and $4 million in the prior-year quarter.

East West continues to maintain a strong allowance for noncovered loan losses of $246.5 million, or 1.35% of noncovered loans receivable as of June 30, 2014.

Further, during the second quarter we reported an expense of $8.5 million as additional clawback liability.

Under the loss share agreements with the FDIC, if losses in the covered portfolio do not reach specific thresholds, the bank is required to pay the FDIC a calculated amount.

As of June 30, 2014, our total reported liability to the FDIC for this clawback liability for both the UCB and WFIB acquisitions was $90 million.

Moreover, as we near the end of the UCB commercial loss share agreement with the FDIC in the fourth quarter of this year, we are taking appropriate measures to ensure that we work through any remaining problem loans and account for the end of loss share appropriately.

In the second quarter, as a result of the continued better than expected credit quality of the covered portfolio, we continued to write down the FDIC indemnification asset to the levels we expect to receive reimbursements from the FDIC, resulting in the line item changes in FDIC indemnification asset receivable or payable and noninterest income of a negative $57.6 million.

Additionally, during the second quarter, the FDIC indemnification asset swung from the net asset to a net liability, as the estimated clawback liability of $90 million as of June 30, 2014, is now larger than the estimated reimbursements from the FDIC on any future expected charge-offs.

Moving on to noninterest income, East West reported a noninterest loss for the second quarter of 2014 of $14.9 million, unchanged from the first quarter of 2014 and compared to a noninterest loss of $12.4 million for the second quarter of 2013.

Also included in noninterest loss for the second quarter of 2014 were net gains of $6.8 million related to the sale of government-guaranteed student loans and SBA loans.

Branch fees led our credit and foreign exchange income.

Loan fees and other operating income totaled $35 million in the second quarter of 2014, a $6 million increase from the first quarter of 2014 and a $4.6 million increase from the prior year period.

This increase was largely a result of greater customer transaction volume and resulting fee income from the issuances of letters of credit, foreign exchange transactions, interest rate swap transactions, and investment advisory services.

Moving on to noninterest expense, noninterest expense for the second quarter of 2014 totaled $127.9 million, an increase of $3.5 million or 3% from the first quarter of 2014, and an increase of $33.5 million or 35% from the second quarter of 2013.

The increase in noninterest expense from the previous quarter was largely due to a $6.9 million increase in the amortization expense related primarily to new tax credit investments entered into during the quarter, and a $5.3 million increase in legal expense, partially offset by $8.8 million reduction in Metro integration and merger-related cost.

During the second quarter, we purchased additional tax credit investments comprised of affordable housing tax credits, historic tax credits, and renewable energy tax credits, which resulted in the higher amortization expense during the quarter and correspondingly a reduction in the effective tax rate for the full year 2014 to 29%, down from our previous estimate of 32%.

Compared to the prior quarter, the increase in legal expense was largely due to the settlement resolution reached in the second quarter of 2014.

Finally, the total merger- and acquisition-related expenses for the second quarter decreased $8.8 million from the first quarter of 2014 and totaled $1.8 million for the second quarter.

These expenses for the second quarter were largely comprised of compensation cost for transitional employees and termination costs for leases on exited properties.

With the completion of the systems conversion, we also consolidated a total of seven branches in the quarter, three in Texas and four in California.

Finally, as stated in the earnings announcement released yesterday, East West's Board of Directors has declared third-quarter dividends on the common stock.

The common stock cash dividend of $0.18 is payable on August 15, 2014, to shareholders of record on August 1, 2014.

I will now turn the call back to Dominic.

Thank you, Irene.

I will now open the call to questions.

(Operator Instructions)

Dave Rochester, Deutsche Bank.

Quickly, on the expense side, you mentioned the lumpy increases in legal and amortization of investments in the affordable housing partnerships.

Just wondering how much you expect legal to decline in 3Q without the settlement expense in there?

It seems like that figure could come down pretty materially next quarter.

Is that a fair way to look at it?

Yes.

We expect so because of the expenses quarter, the total expense, Dave, about $4.5 million of it had to do with settlements of several litigations.

So, that is something we don't expect to recur.

And the amortization line, will that decline is well, coming into 3Q?

That will decline a little bit because there was a true-up in the second quarter.

Because it has to do with -- for the 2014 tax year.

So, I would expect from that, the level that we had of the $12 million or $13 million or so, it will come down, say, $9 million or $10 million.

$9 million or $10 million, okay.

And you also have the cost saves from MetroCorp kicking in completely in 3Q.

With that going for you as well, it seems like the new expense guidance range is a little bit higher than we would have expected.

Is this a case of you being a little conservative, here?

I think there are certainly some elements -- that's why we give a range, right, Dave?

Especially with legal, sometimes as well.

We don't know exactly what the future will show.

So, we want to give a range to be a little bit more comfortable.

Switching to a fun accounting question.

I read, I know you track the contribution to EPS from all the accretion/FDIC/SOP accounting each quarter.

This was a modest benefit to earnings last quarter.

It was actually a hit this quarter, is that right?

Yes.

I think the easiest way to look at that is what the net accretion -- the benefit to net interest income minus the write-up of the indemnification asset.

And this quarter, the impact of that was about $6 million in total positive.

And as discussed in the press release and earlier, we had $8.5 million clawback, so if you add those together, negative $2.5 million.

Negligible, as far as the benefit impact to earnings in the quarter.

Perfect.

One last one on the margin.

Your guidance points to some pressure in the back half of the year.

It's some of that pressure related to your expectation for decline in net accretion?

If so, how much of it is coming?

Yes.

Yes.

Certainly, the exact amount of accretion on a quarterly basis is not something we've been able to predict with any accuracy.

So, we want to give a little more range of that.

Generally speaking, the portfolio is winding down, so the amount that's getting accreted on a quarterly, monthly basis is diminishing.

While that net accretion is generally an optical margin headwind, or an NII headwind, it's completely offset by the clawback expense right now?

That's correct.

From a bottom-line perspective, right?

That's correct.

Perfect.

Thanks, guys.

Jennifer Demba, SunTrust Robinson Humphrey.

You guys have had very strong loan growth in the first half of the year.

I'm just curious as to how much of that is coming from your new markets in Texas?

In Texas, actually, it's not much at all.

Because, keep in mind that we closed the Metro bank deal in January, and then from January through June, our primary focus was to take care of all the system conversion issue, provide staff the training to learn how to use the East West Bank system and provide training on learning about East West Bank's new products that were not available to Metro in the past.

So, it's all administrative work, pretty much.

I would say that we have absolutely no focus at all, in terms of getting the Texas folks to grow the loan portfolio.

However, now, when all of these things are done, we anticipate we are going to start ramping up sometime in the third quarter.

Most likely, you won't see much in the third quarter, but I would expect in the fourth quarter, these leads will generate into funding.

Thank you.

Joe Morford, RBC Capital.

Follow-up on loan growth.

The cross-border trade finance has been a healthy driver to growth in Hong Kong.

How big are you willing to let that portfolio get?

Are there other opportunities you see in that market longer-term on the lending side?

I think we anticipate that it will be more growth in Hong Kong for the cross-border type of transactions.

That's just natural progression.

But, I don't think that we will see a huge surge, so to speak.

Everything we do at East West, we always want to make sure there is a balance.

If we get too fast, we slow it down.

A good example, if you look at our home mortgages.

In 2012, it really was going really nicely because of the fact that most of the other banks were not quite geared up to do mortgages, but when it gets you a certain size, we decide that it's time to taper it off a little bit.

So, I looked at it as first of all, at this point, I don't anticipate any huge surge because of the market of economy or anything like that.

But, if it does get into that situation, we wouldn't let it go too much of a high concentration, because we want to have a diverse final portfolio.

Separately, Dominic, there have been a number of media reports about the impact of Chinese cash buyers in the US and subsequent warnings there that China is cracking down on some of this outflow of funds.

What kind of impact has this activity had, if any, on your lending and deposit activity, or just your markets, in general?

In terms of lending, it wouldn't have much impact at all.

The reason is that most of the cross-border transaction that we do is in the commercial banking side.

So, for example, both in China and in Hong Kong, we only focus on commercial banking.

We do not do any retail banking, consumer banking, at all.

In the US, we obviously have a pretty big retail franchise.

So, there may be small depositors coming from China, but because of the discontinuation of this experimental program in the southern province of China, that may slow down some of the deposit flow into US.

And I don't think that will make too much of an impact to our retail banking because we have so many customers.

It's not really one of what I call primary focus primary focus and growth.

We really are much more focused in US/China banking relationship, in terms of commercial banking side.

Then we look at some of the commercial banking customers from China.

Most of them have already -- you go through IPO of the companies in Hong Kong that they have excess liquidity in Hong Kong and bring to the US.

Or, when we look at some of these companies, they have already set up an operation from BDI to Cayman Island and so forth.

So, it's not a whole lot of what I call new money that's just coming through this experimental program.

Also, keep in mind, it's only one province in China that the Chinese government are using that few banks over there to experiment, this movement of currency from China to some of the international world.

So, it's not like the entire country, every single bank actually going through that.

I would expect the impact, overall, would not be very significant.

But, time will tell.

At this point, I would say that it would be definitely immaterial.

Okay.

That's helpful.

Thanks, Dominic.

Ibrahim Poonawala, Bank of America.

I had a follow-up question regarding taxes.

Last quarter, I believe you talked about hiring C&I lenders there, and I was just wondering where we were, in terms of hiring in Texas, if you could talk about that.

In general, or recruiting in both the US and in China, what the outlook is for the second half of the year.

The first question, in terms of that new hire for Texas, we are continuing hiring new bankers.

As of today, we have hired a total of 34 bankers.

The majority of them are for the branch -- retail branches.

But, we have, I would say -- all in all -- maybe around seven to eight commercial bankers, so far.

We will continue to hire more, going forward, in the next two quarters.

The idea is that not only we are taking on the Metro Bank platform and the existing bankers that we have and grow from there.

The whole idea is that with the additional new products from East West that Metro didn't have, we also think that we need to supplement the existing staff with some new hires.

New hires that are very experienced into tree finance, foreign exchange, things like that.

So, as long as we continue to move in that direction, I think that we will have a much better growth opportunity in the state of Texas.

But, I do want to highlight that at this point, one of the key areas that we're are interested in getting to is the oil and gas area.

At this point, we have not yet brought in a team in that industry, and it's really, simply, for the reasons that we want to do things in phases.

The first phase was to make sure that we have a consistent, uniform system in place.

Then, we need to train our existing Metro staff to learn the East West bridge banking products and services and to make sure to connect with our people in terms of cash management, foreign exchange, international trade finance and all of those stuff that we are pretty good at.

We want to make sure we have a connection with the Metro folks that we brought in.

Then, we will hire new commercial bankers and make sure the commercial bankers can do really well with the industry and products we are really good at, at East West.

Then, the next phase will be going into looking into bringing in people that have the oil and gas experience.

It's one step at a time.

Now, I forget about what the second question was.

About China -- hiring in China.

Hiring in China, we continued to hire folks in China.

For example, we are opening a new branch in Shenzhen, which is the southern part of China, which is only an hour drive away from Hong Kong.

So, with the new Shenzhen branch, we will put in commercial banking officers.

And so there's no question that with that additional branch, we will see a little bit more growth in China.

And, I think, in the latter part of this year, we will also open another branch in Shanghai, which is in the free trade zone.

I expect that we will also hire a few more commercial bankers stationed in the free trade zone to conduct business and help our US customers with substantial more convenience because of a much lighter regulation in that area.

We will be also looking to hire more bankers in the Hong Kong office.

We will not be doing anything in an excessive manner.

It's always going to be one or two individuals at a time to make sure they are the right fit.

They are the kind of people that understand cross-border banking business, really embrace the bridge banking concept.

Those are the people that we hire to grow future business.

Got it.

Thank you very much.

Sorry if I missed this.

Did you say how big the Hong Kong China portfolio was at the end of the second quarter?

In Hong Kong, Ibrahim, we had a total of about $400 million or so in loans.

In China, about $250 million or so.

All right.

Thank you very much.

Brett Rabatin, Sterne Agee.

Was hoping to cover some more stuff around loan growth and just thinking about the forward guidance.

I realize that you won't have the -- or maybe the trade finance growth is a little exceptional in Q2.

I was just curious around the forward guidance, not really changing on loan growth, if there was anything to think about around that.

It seems like growth continues to exceed your $400 million or so expectations on a quarterly basis.

The other thing was just thinking about loan spreads, was just curious, Dominic, if you had any thoughts on what you were seeing from a loan spread perspective, especially in C&I, if things are finally starting to firm up or if you are still seeing some pressure.

In terms of C&I, I think there's a lot of competition in the market.

So, we've been seeing a lot of pressure.

At this point, I don't see the pressure is going to get much worse, for the simple reason is that it's already pretty bad.

So, I just don't expect that other banks will go even further south, in terms of undercutting pricing because it has to really hurt their margin and their profitability.

My sense is that I've been looking at the markets, so far, that many banks are taking a hit from the overall compliance cost and all kinds of other expenses.

Many banks are not very profitable.

So, I really think that the likelihood of them continuing to go down and take a much lower pricing.

Also on the real estate side, with every three months past, it's another three months closer to the rising interest rate.

So, while I think for the last two years we've seen banks extremely aggressive, taking substantial interest rate risk to make commercial real estate loans, you would think by some point in time, they also have to take a step back and say enough is enough.

So, my current prediction is that there is a less likelihood that the very fierce competition that drives down pricing for the last, I would say, eight quarters or so, will continue to go into the same pace.

I would think that that would have to eventually slow down.

So, that's my two cents, in terms of what I think.

When it comes to -- so that was the spread.

What the other question?

Loan growth.

Our loan growth, we always trying to not be too aggressive in terms of our projection.

Sometimes, projecting too aggressively will just put ourselves in too much pressure and trying to make numbers, and that's not very good.

So, we think that the normal growth is about $400 million a quarter or so, and that's what we expected.

Occasionally, our staff delight us with good numbers.

I think that, sometimes, particularly this cross-border transaction in China, and it does have a little bit with -- sometimes the Chinese regulation changes a little bit and help us to move up in terms of the loan growth.

And if it tightens up a little bit, and then we sometimes end up slowing down the loan growth.

It's really hard to predict because it's a very fast-changing environment, there.

The country is making reforms on a daily basis and regulation changes, night and day in the second.

So, what we try to do is make sure that we prudently stay ahead of the schedule and make sure that we do the right thing, and it's really a little bit difficult for us to figure out exactly how much we can do.

But I think our position is that if it does have something really huge coming in, something like a positive opportunity, we would not -- we would try to leave money on the table instead of just trying to grab every dollar of it.

The whole idea is that we want to make sure that our goals stay a bit more consistent.

At this stage, I think we are fortunate to have two quarters of nice growth.

We don't know what the pleasant surprise will be coming, from which category, CRE or one industry from C&I, at this point it's too early to tell.

I hope that we will have another pleasant surprise in the third quarter.

Okay.

Thank you.

Aaron Deer, Sandler O'Neill.

Dominic, you've given some good color around what's going on with C&I, in particular the cross-border and trade finance.

Also, I think you mentioned that entertainment and private equity has been a contributor of growth.

Can you talk about some of those other lending niches where you're having good success and where you're looking to continue to build out your lending platform?

We highlight entertainment, private equity because they actually are the ones that contributed together with the trade finance with what I call the high percentage growth for the second quarter.

However, we have other more generic C&I loans through various different industries.

They are bread-and-butter business for East West Bank.

Just because second quarter they have not been a great contributor, there's high likelihood that they may be coming strong with another quarter.

The whole idea that we have, is to make sure that we have a very diversified type of industry mix.

So, we are developing the life science industry.

We are making decent gains in the culture sector and third quarter, agriculture may come in strong and surprise us.

We don't know yet.

We hope agriculture would be featured next quarter.

So, beyond that, we do some aviation business from our Seattle office and, obviously the traditional manufacturing base and wholesale distributors, it's always going to be our sort of bread-and-butter business that we have in the C&I said.

I'm trying to think what else.

Technology and healthcare.

We continue to make investments into the technology sector.

So, we hope that the high-tech group will step up stronger in the second half of 2014.

Okay.

That's great.

Thank you.

Irene, with respect to the loans, looks like you guys sold another $180 million or so this quarter.

What amount is left on the balance sheet, either in student loans or other categories where there's a good secondary market that you would continue to be looking at possible sales?

Sure.

This quarter, we sold two categories of loans, government guaranteed student loans and all of the SBA loans.

With the SBA program, we are selling what we originated in the market.

With the government guaranteed student loans, earlier, we change a lot of the classifications to loan held for sale.

If you look at it as of June 30, we had about $450 million in loans held for sale.

Not necessarily one quarter, but over time, we have designated those for sale.

Okay.

Can you give us a sense of what your SBA production was in the quarter?

Yes.

I don't have the exact number of the production.

But, we sold about $20 million.

Very good.

Thanks for taking my questions.

Gary Tenner, D.A. Davidson.

You had the question earlier about the loan growth out of Texas and whether there was any impact in the quarter.

I'm curious the same thing on the deposit side.

Very good success this quarter in the improved mix of deposits and overall lower cost of funding.

Any event of that benefiting from the new market?

Overall, I think we actually see nice growth in Texas, in terms of deposit.

The deposit in Texas actually has gone up $125 million, 10% for the Texas region just in the second quarter.

This is pretty remarkable.

Well, I guess it's for the whole six months.

It's pretty remarkable because all along, we anticipate with every merger that we've done, that it's always going to be an outgrowth of deposit, because that's just natural, that's expected.

Clearly, we also have some high-cost deposits that we let go.

In fact, as you can see, our cost of deposits continue to go down.

We are not going to be interested to take on all these high-cost CDs and stuff like that.

We let some high-cost CDs run out.

Overall, we continue to have organic growth in Texas region which results in 10% growth, $125 million, just in the state of Texas.

Okay.

The 10% or $125 million was since the date of close, not just the second quarter, correct?

That's right.

It's year to date, but we close on the 17th of January.

It's pretty much the same thing.

Perfect.

My other questions were answered.

Thanks.

(Operator Instructions)

Julianna Balicka, KBW.

I wanted to follow-up on one of the earlier questions and comments you are making about Texas, where you I think you said had made 34 new hires that the branch level.

Does that imply that you're opening more branches, or are these product specialist persons coming in alongside the pre-existing staffing from Metro?

I know Metro had a pretty large number of branches for its footprint.

And related to that, could you comment on cost savings, whether those have already been in your expense run rate, et cetera, from the acquisition?

In terms of the 34 new hires, it's not all for branches.

Some of them are commercial bankers.

Some of them are specialists.

A good example would be -- I mean, Metro in the past did not have the foreign exchange products.

So, we need foreign-exchange person down there to take care of our business.

We need wealth management individuals down there, to help in the prior banking business that they didn't have before.

So, we hired specialists down in Texas to support their new product services that we are providing, and we obviously hire new branch manager is to replace some of the managers that we -- I think that terminate at the merger transaction.

Then, we brought in new commercial bankers to do commercial loans, and then there are also some of them are just junior level branch staff that have to take care of the branch business.

So, that's all together add up to 34 people.

But, it's not a 34 net growth.

Obviously, these are just new hires.

Keep in mind, they're are substantial reduction of the workforce at this merger.

Got it.

Is the cost savings you are planning on achieving with this merger already in your current run rate from this quarter and therefore there's going to be nothing incremental other than additional growth from Texas?

Right now, yes.

In the future quarters, there will be the incremental new hires.

Right.

Okay.

One more follow-up.

On commercial real estate, could you comment about the various trends by property type that you are seeing in geographies around California?

Is there anything in particular that you like these days or anything that's getting overheated -- just some bigger picture comments given your expertise?

Most of the commercial real estate markets are doing well.

I'd say that part of the reason that our growth is not as strong as what we used to have a few years ago on the commercial real estate, is that it's most of the competitors.

They are offering 7 years, 10 years fixed.

We just do not want to offer a long-term fixed rate.

So, I think it's more on pricing and fixed rate that we are not willing to portfolio for those loans.

At this point, from office buildings, hotels, retail shopping centers, et cetera, et cetera.

We really have not seen any commercial real estate properties in the market region that we have, our branch network and so fourth, that are I would say overheated to this point that it's gets to the point of the bubble about to burst, so to speak.

Most of the province are not cheap, obviously.

You look at New York, San Francisco, Los Angeles.

I would say that in general, the property price are not cheap.

But, they are also not excessively high.

Then, we also have to look at what's the alternative, in terms of investment opportunity.

If we base on what the market today and the interest rate environment, everything combined together, I would say, in general, these properties are relatively in a healthy position.

So, we do not have concern, in terms of lending to the market due to overheated or maybe valuation that are out of control.

We just haven't been able to generate as much as we would like, in terms of lower origination due to the fact that as Julia just mentioned, the competition is really aggressive out there.

Very good.

Thank you very much.

(Operator Instructions)

Thomas Alonso, Macquarie.

I'm sorry if you covered this.

I got on the call late.

The amortization expense on the tax rate, I understand that continues for the rest of 2014.

Is that something we should expect to see into 2015, as well, that higher amortization charge and a lower tax rate?

Most of the additional kind of tax credits that we purchased, Thomas, were for the 2014 years.

So, if new tax credits are not purchase, you will see those levels change for us in 2015.

Okay.

The amortization falls back down and the tax rate goes back up?

And we will give guidance on it given our projections and estimates of what we have at the beginning of next year for 2015.

Terrific.

Thank you.

As we are showing no further questions, this concludes the question and answer session.

I would like to turn the conference back over to Dominic Ng for any closing remarks.

Thank you all for joining our call today, and we will speak with you again in October.

The conference is now concluded.

Thank you for attending today's presentation.

You may now disconnect.