East West Bancorp's (EWBC) CEO Dominic Ng on Q2 2014 Results - Earnings Call Transcript

| About: East West (EWBC)

East West Bancorp, Inc. (NASDAQ:EWBC)

Q2 2014 Results Earnings Conference Call

July 17, 2014 11:30 a.m. ET

Executives

Dominic Ng – Chairman & CEO

Julia S. Gouw – President & COO

Irene H. Oh – Executive VP & CFO

Analysts

Dave Rochester – Deutsche Bank

Jennifer Demba – SunTrust Robinson Humphrey

Joe Morford – RBC Capital Markets

Ebrahim Poonawala – Bank of America Merrill Lynch

Brett Rabatin - Sterne Agee

Aaron Deer – Sandler O'Neill

Gary Tenner – D.A. Davidson

Julianna Balicka – KBW

Thomas Alonso – Macquarie Capital

Operator

Good morning and welcome to the East West Bancorp Second Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I’d now like to turn the conference over to Irene Oh, Executive Vice President and Chief Financial Officer. Please go ahead.

Irene H. Oh

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’d 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 eastwestbank.com.

I’ll now turn the call over to Dominic.

Dominic Ng

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 and 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 the 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 loans and 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 East and the West, we continue to see increased business opportunities from U.S. 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 noninterest-bearing demand deposits. Over the course of last [few] years, East West has made 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 noninterest-bearing demand deposits by $3.1 billion or 80% and we have grown total core deposits by $5.6 billion or 51%. Noninterest-bearing demand deposits now comprise 30% of our total deposits, an increase from 22% of total deposit 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 am pleased to report that the balance sheet growth we achieved was without compromising profitability, both the adjusted net interest income and the adjust net interest margin increased quarter-over-quarter. For the second quarter of 2014 adjusted net interest income totaled $218.4 million or 4% increase from the first quarter of 2014, additionally the adjusted net interest margin for the second quarter was 3.46% up one basis point from the previous quarter.

Earlier this year in January, we closed the acquisition of MetroCorp BancShares Inc. I am pleased to report that the full conversion of MetroCorp system was completed in June. We are delighted to now be able to offer our newest customers to 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 was 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 would 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.

Julia S. Gouw

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’ll 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 a billion dollar 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 a $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 non-covered CRE loans of approximately $240.3 million or 5%, non-covered 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 non-covered 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 non-covered 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 continue to execute on our long term strategy to go low cost commercial deposits. Core deposits increased $198.7 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 assets 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 one 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 increase of our non-covered loan portfolio and the reduction in the cost of deposits to 28 basis points.

Lastly, I’d 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 under adjusted net interest margin ranging from 3.35% to 3.4%, an increase from the previous guidance provided with under stronger than expected loan growth we experienced in the first half of the year. Further, we’ve 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’d now like to turn the call over to Irene to discuss our second quarter 2014 financial results in more depth.

Irene H. Oh

Thank you very much Julia and good morning. I will discuss our financial results for the second quarter of 2014 in more detail, specifically credit quality, non-interest income and non-interest expense.

Starting with credit quality, the total non-performing assets, excluding covered-assets-to-total-assets ratio continues to be under 1% as it has been for over four consecutive years with non-performing assets at $161.4 million or 59 basis points of total assets as of June 30, 2014. Non-accrual 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 from non-covered 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 non-covered 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 non-covered loan losses of $246.5 million or 1.35% of non-covered loans receivable as of June 30, 2014. Further, during the second quarter we recorded an expense of $8.5 million as additional clawback liability. Under the lost share agreement 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 recorded 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 covered 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 continue to write down the FDIC indemnification assets to the levels that we expect to receive reimbursements from the FDIC resulting in the line item changes in FDIC indemnification assets, receivable or payable in non-interest income of a negative $57.6 million. Additionally, during the second quarter the FDIC indemnification assets swung from a 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 non-interest income, East West reported a non-interest loss for the second quarter of 2014 of $14.9 million unchanged from the first quarter of 2014 and compared to a non-interest loss of $12.4 million for the second quarter of 2013. Also included in non-interest loss for the second quarter of 2014 were net gains of $6.8 million related to the sales of government guaranteed student loan and SBA loans.

Branch fees, letter of 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 advisories or visits.

Moving on to non-interest expense, non-interest expense for the second quarter of 2014 totaled about $127.9 million, an increase of $3.5 million or 3% from the first quarter of 2014, an increase of $33.5 million or 35% from the second quarter of 2013. The increase in non-interest 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 costs.

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 a 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 resolutions 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 cost for leases on exited properties. With the completion of the systems conversions, 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 board of directors has declared third quarter dividend 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.

Dominic Ng

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

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Dave Rochester with Deutsche Bank. Please go ahead.

Dave Rochester – Deutsche Bank

Good morning, guys.

Irene H. Oh

Good morning, Dave.

Dave Rochester – Deutsche Bank

Hey just quickly on the expense side, you mentioned the lumpy increases in legal and amortization of investments in the affordable housing partnerships. We are just wondering how much you expect legal to decline in 3Q without that the settlement expense in there. It seems like that figure you can come down pretty materially next quarter. Is that a fair way to look at it?

Irene H. Oh

Yes, we expect so because of the expense this quarter, the total expense Dave, about $4 million, $4.5 million although had to do with settlements of several litigations. So that is something we don't expect to reoccur.

Dave Rochester – Deutsche Bank

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

Irene H. Oh

That will decline a little bit because there was a true up in the second quarter because these have to do with the -- for the 2014 tax year, so I would expect from that the level that we had of the $12 million, $13 million or so, it will come down say $9 million to $10 million.

Dave Rochester – Deutsche Bank

9 to 10, okay. And you guys also have the cost saves from MetroCorp kicking in completely in 3Q, so 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 just the case you are being a little conservative here?

Irene H. Oh

Well, I think, there are certainly some elements, well 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 able to be more comfortable.

Dave Rochester – Deutsche Bank

Great. And switching to fund accounting question, I remember you attract 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?

Irene H. Oh

Yes, I think the easiest way to look at that is what the net accretion is. The benefit to net interest income minus the write off of the indemnification asset and this quarter the impact of that was about 6 million in total positive and then as discussed in the press release and earlier, we had 8.5 million clawback, so that’s if you add those together a negative 2.5 million, so negligible as far as it benefit impact to earnings in the quarter.

Dave Rochester – Deutsche Bank

Perfect and just one last one on the margin, your guidance points to some pressure in the back half of the year, is some of that pressure related to your expectation for decline in net accretion and if so how much of it’s coming through that?

Irene H. Oh

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 get a little bit of range of that generally speaking the portfolio is winding down, so the amount that’s getting accreted on a quarterly, monthly basis is diminishing.

Dave Rochester – Deutsche Bank

And while that net accretion is generally like an optical margin headwind and an NII headwind it’s really being completely offset by the clawback expense right now and from a bottomline perspective, right?

Irene H. Oh

That’s correct.

Dave Rochester – Deutsche Bank

Perfect, alright. Thanks guys.

Operator

The next question comes from Jennifer Demba with SunTrust Robinson Humphrey, please go ahead.

Jennifer Demba – SunTrust Robinson Humphrey

Thank you. Good morning. You guys have had very strong loan growth in the first half of the year, I’m just curious if how much of that is coming from your new markets in Texas?

Dominic Ng

Well, in Texas actually it’s not much in all because keep in mind that we’ve 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 was not available to Metro in the past. So this is all administrative work pretty much, so 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 these things have done, so we anticipate, we’re going to start ramping up, some times in the third quarter, so most likely you won't see much in the third quarter but I would expect that in the fourth quarter, these leads would generate into funding.

Jennifer Demba – SunTrust Robinson Humphrey

Thank you.

Operator

The next question comes from Joe Morford with RBC Capital, please go ahead.

Joe Morford – RBC Capital Markets

Thanks. Good morning everyone.

Irene H. Oh

Good morning.

Julia S. Gouw

Good morning, Joe.

Joe Morford – RBC Capital Markets

Follow-up on I guess loan growth, the cross-bordered trade finance has been healthy driver of the growth in Hong Kong, how bigger are you willing to let that portfolio get and are there other opportunities you see in that market kind of longer term on the lending side?

Dominic Ng

I think we anticipate that there 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 because everything that we do at East West we always want to make sure there is a balance. I mean if you get too fast, we will slow it down. I mean a good example, you look at home mortgages. In 2012, it really was going very nicely because of the fact that most of the other banks would not quite care up to do mortgages and well when it get to a certain size, we decided that it's time to taper it off a little bit and so I would looked at it, as you just said, if -- first of all, at this point I don't anticipate any huge surge because the market of economy or anything like that but on -- 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].

Joe Morford – RBC Capital Markets

And separately Dominic, there have been a number of media reports about the impact of Chinese cash buyers in the U.S. and then subsequent kind of warnings there that China is cracking down on some of these outflow of funds. What kind of impact this activity had on if any on your kind of lending and deposit activity or just your markets in general?

Dominic Ng

Well in terms of lending it wouldn't have any much impact at all. The reason is that see most of the cross-border transactions that we do, is in the commercial banking side. So for one, 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. Now in U.S., there are -- we obviously we have a pretty big retail franchise. So there may be small depositors that coming from China that because of the discontinuation of this experimental program in the southern province of China that may somewhat like slowdown some of the deposit flow into U.S. and -- but I don't think that will make too much of an impact to our retail banking because we’ve so many customers and it's not really one of our what I call primary focus in growth because we really are much more focused in U.S., China banking relationship in terms of in the commercial banking side.

Now then we look at some of our commercial banking customers from China. Most of them have already either through IPO of their companies in Hong Kong that they have excess liquidity in Hong Kong and bring it to U.S. or when we look at some of these companies they have already set up operation in from BDI to Cayman Island and so forth and so it's not a whole lot of those what I call new money that just coming through the solo experimental program and then 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 sort of the international world. So it's not like the entire country, every single bank are actually going through that. So I would expect that the impact overall would not be very significant but time will tell but at this point I would say that it will be definitely immaterial.

Joe Morford – RBC Capital Markets

Okay. That's helpful. Thanks, Dominic.

Operator

The next question comes from Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala – Bank of America Merrill Lynch

Good morning, guys.

Irene H. Oh

Good morning.

Dominic Ng

Good morning

Ebrahim Poonawala – Bank of America Merrill Lynch

I had a quick follow-up question regarding Texas. 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 we can talk about that and just in general, overall recruiting both in the U.S. and in China, what the outlook is for the second half of the year?

Dominic Ng

The first question in terms of that new hire for Texas, we are continuing hiring new solo bankers. As of today, we have hired total of 34 bankers. Now, the majority of them are for the branch -- retail branches and but we have I would say that all-in-all maybe around seven to eight commercial bankers so far and we will continue to hire more going forward in the next two quarters. The idea is that we are not only taking on the Metro Bank platform and then just existing bankers that we have and go 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. The new hires, they are very experienced into trade finance, foreign exchange things like that and so that as long as we continue to move in that direction I think that we will have a much better growth opportunities in the state of Texas but I do wanted to highlight that at this point one of the key area that we are interested in getting to is 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 reason is that we want to do things in phases. The first phase was to make sure that we have a consistent, uniform system in place and then we need to train our existing Metro staff to learn the East West bridge banking products and services and to make sure connect with our people with 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 that we have a connection with the Metro folks that we brought in. Then we hire new commercial bankers and we will make sure that commercial bankers can do really well with the industries and products that we are really good at East West. And then, the next phase will be going into looking to bringing people to have the oil and gas experience. So this is one step at a time. So now I forget about what the second question was.

Ebrahim Poonawala – Bank of America Merrill Lynch

It was about hiring in China.

Dominic Ng

Hiring in China, we continue to hire folks in China. For example we are opening a new branch in Shenzhen which is the southern part of China which only has an hour drive away from Hong Kong and so with the new Shenzhen branch we will put in commercial banking officers and then so there is no question with that addition of branch we will see little bit more growth in China. And I think at the later part of this year we also open another branch in Shanghai which is in the free trade zone. So I expect that we will also hire a few more commercial bankers stationed in the free trade zone to conduct business and help out U.S. customers with substantial more convenience because of a much lighter regulation in that area.

And we also will be looking into hire more bankers in the Hong Kong office but we would not be doing anything in a excessive manner, I mean it's always going to be one or two individuals at a time to make sure that they are the right fit and they are the kind of people that understand cross-border banking business, really embrace the bridge banking concept and those are the people that we hire and to grow future business.

Ebrahim Poonawala – Bank of America Merrill Lynch

Got it. Thank you very much and I am sorry, if I missed this, did you see how big the Hong Kong, China portfolio was at the end of the second quarter?

Dominic Ng

Irene?

Irene H. Oh

Yes. In Hong Kong, Ebrahim, we had a total of about $400 or so million in loans and in China about 250 or so.

Ebrahim Poonawala – Bank of America Merrill Lynch

Alright. Thank you very much.

Operator

The next question comes from Brett Rabatin with Sterne Agee. Please go ahead.

Brett Rabatin - Sterne Agee

Hi. Good morning. I was just hoping to cover some more stuff around loan growth and just thinking about the four guidance like I kind of realize that you won't have the or maybe that trade finance growth is little exceptional in Q2 but I guess I was just curious around the four guidance not only changing the 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. And then the other thing I was just thinking about loans spread, I was just curious, Dominic if you have any thoughts on or what you are seeing from the loan spread perspective especially in C&I if things were finally starting to firm up or if you still seeing some pressure.

Dominic Ng

Well in terms of C&I, I think that there is a lot of competition in the market. So we have been seeing a lot of pressure. At this point, I don't see the pressure is going to get much worse. The very simple reason is that while 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. So my sense is that I have been looking at the market so far that many banks are picking heat on from overall compliance cause and all kinds of other expenses and many banks are not very profitable. So I really think that the likelihood of them continue to go down and then take up much lower pricing and also on the real estate side with every three months passed, it's another three months closer to the rising interest rate. So while I think for the last two years, we have seen banks have worked extremely aggressive, taking substantial interest rate risk to make commercial real estate loans, you would think that by some point in time, they also have to sort of take a step back and say that enough is enough. So my current prediction is that there is a less likelihood that a very fierce competition that cut – drives down pricing for the last I would say a quarter or so will continue to go into the same pace. I would think that will have to eventually slow down. So that's my sort of like two sense in terms of what I think and when it comes to – so that's on the spread, what's the other question?

Brett Rabatin – Sterne Agee

Loan growth.

Dominic Ng

Loan growth. Our long growth, we are always trying to not be too aggressive in terms of our projection because sometimes projecting too aggressively will just put ourselves in too much pressure in trying to make numbers and that's not very good. So we think that the normal growth it's about 400 million a quarter or so and that's what we expected but occasionally our staff delight us with good numbers and I think that sometimes in the particularly this cross-border transaction in China and it does have a little bit with -- sometimes the Chinese regulation changed a little bit and help us to move up in terms of the long growth and then if it tighten up a little bit and then we sometimes we have – we end up slowing down the loan growth and it's really hard to predict because it's a very fast changing environment there and country is making reforms on a daily basis and regulation changes light and day in the second. So what we are trying to do is to make sure that we prudently stay ahead of the schedule and then make sure that we do the right thing and it's really 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 that is sort of like positive opportunities we would not – we will 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 we – our growth stays a bit more consistent. So 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, is it CRE or is it a one industry upon C&I, at this point it's too early for us to tell but I hope that we will have another pleasant surprise in the third quarter.

Brett Rabatin – Sterne Agee

Okay. Thank you.

Operator

The next question comes from Aaron Deer with Sandler O'Neill. Please go ahead.

Aaron Deer – Sandler O'Neill

Hi. Good morning, everyone.

Julia S. Gouw

Good morning.

Aaron Deer – Sandler O'Neill

Dominic, if you can put some good color around what’s going around the C&I and in particular in the cross-border and trade finance, so I am wondering, also I think you have mentioned that entertainment and private equity has been a contributory growth, can you talk about some of those other lending niches where you are having good success and where you are looking to continue to build out your lending platform?

Dominic Ng

So we highlight as entertainment private equity because they actually are the one that contributed together with the trade finance with what I call the high percentage growth for the second quarter. However, we have other just more generic C&I loans that to a various different industries, they are bread and butter business for East West Bank just because second quarter they have not been the great contributor there is high likelihood that they may come in strong when another quarter. The whole idea that we have is to make sure that we have a very diversified type of industries mix, so we developing the life science industry, we are making decent gain in the agriculture sector and so third quarter agriculture may come in strong and then surprise us, we don’t know yet but we hope maybe agriculture would be feature 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 like bread and butter business that we have in the C&I side. I’m trying to think what else -- technology and healthcare, yes technology and healthcare we are continue to make investments into the technology sector. So we hope that the HiTech Group will step up stronger in the second half of 2014.

Aaron Deer – Sandler O'Neill

Okay, that’s great. Thank you. And then Irene with respect to the loans sales which you guys sold for another $180 million or so this quarter, what amount is left on the balance sheet either in student loans or other categories for there is a good secondary market that you would continue to be looking at possible sales.

Irene H. Oh

Sure. This quarter we saw two categories of loans, government guaranteed student loans and then also SBA loans. With the SBA 7(NYSE:A) program, we’re selling what we are originating in the market. With the government guaranteed student loans, our earlier, we change a lot of the classification to loan held for sale so if you look as of June 30, we had about $415 million in loan held for sale so you are not necessarily one quarter but overtime we have designated those for sale.

Aaron Deer – Sandler O'Neill

Okay and can you give us a sense of what your SBA production was in the quarter?

Irene H. Oh

I don't have the exact number of the production but we sold about $20 million.

Aaron Deer – Sandler O'Neill

Okay. Alright. Very good. Thanks for taking my questions.

Operator

The next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner – D.A. Davidson

Good morning everybody. You have the question earlier about the loan growth out of Texas and whether there was any about there in the quarter. I would be 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 of that benefiting from the new market?

Dominic Ng

Overall, I think we actually see nice growth in Texas in terms of deposits. The deposit in Texas actually 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. Now this prove remarkable because we all along anticipate with every merger that we have done that’s always going to be outgrow the deposit because that's just natural as expected but I mean, clearly we also have some high cost deposit that we let like go and in fact that's why you can see our cost of deposit continues to go down. So we are not going to be interested to stick on all these high cost CDs and stuff like that. So we let some high cost CDs went out but overall, we continue to have organic growth in Texas region and which resulted in 10% growth, 125 million just in the state of Texas.

Gary Tenner – D.A. Davidson

Okay and again that 10% or the 125 million was since the date of closing not just the second quarter. Correct?

Irene H. Oh

That's correct. It's year-to-date but we close on the 17 of January, so it's pretty much the same thing.

Gary Tenner – D.A. Davidson

Okay. Perfect. My other questions were answered. Thanks.

Operator

(Operator Instruction) The next question comes from Julianna Balicka with KBW, please go ahead.

Julianna Balicka – KBW

Good morning.

Irene H. Oh

Good morning.

Dominic Ng

Good morning.

Julianna Balicka – KBW

I wanted to follow-up on one of the earlier questions and comments you were making about Texas where you -- I think said you had made 34 new hires at the branch level, so does that imply that you are opening more branches or are these like product specialist persons that are coming in alongside the pre-existing staffing from Metro and Metro had a pretty large number of branches for its footprint and related to that could you comment on cost savings whether that does have already been -- are in your expense run rate et cetera from the acquisition?

Dominic Ng

So in terms of 34 new hires, it's not all for branches. Some of them are commercial bankers and some of them are specialists. A good example will be a foreign, I mean Metro in the past do not have the foreign exchange products, so we need a foreign exchange person down there to take care of our business. We need wealth management individuals down there to help the private banking business that they didn’t have before. So we hire specialist down in Texas to support their -- sort of like new product services that we are providing and we obviously hire new branch managers there to replace some of the managers that, I think that terminate at the merger transactions and 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 and so that's all together add up to 34 people. But it's not a 34 net growth. Obviously these are just new hires because keep in mind there were substantial reduction of the workforce at this merger.

Julianna Balicka – KBW

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

Julia S. Gouw

Right now yes. Yes. So in the future quarters, it will be the increment of new hires.

Julianna Balicka – KBW

Right. Okay. And then let me one more follow-up. On commercial real estate, could you comment about the various trends in property type that you are seeing in geographies around California, so anything in particular that you like these days or is there anything that’s getting overheated just maybe some bigger picture or comments given your expertise?

Julia S. Gouw

Well, most of the commercial real estate market are doing well. I think that the part of the reason that our growth is not as strong as what we used to have few years ago on the commercial real estate. It's most of the competitors they are offering seven year, ten years fix and we just do not want to offer that long term fixed rates. So I think it's more on pricing and fixed rate that we are not willing to portfolio for those loans.

Dominic Ng

And at this point some 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 forth that I would say overheated to this point that it's get to the point of bubble to burst so to speak. I mean it's – I mean most of the properties are not cheap obviously. If you look at New York, San Francisco, Los Angeles, I will say that in general the property price are not cheap but they are also not excessively high. And then we also have to look at what's the alternative in terms of investment opportunities. So it would be based on what the market today and then the interest rate environment and everything combined together I would say in general, these properties are relatively in a healthy position and 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.

Julianna Balicka – KBW

Very good. Thank you very much.

Operator

(Operator Instructions) The next question comes from Thomas Alonso with Macquarie. Please go ahead.

Thomas Alonso – Macquarie Capital

Good morning guys. Just real quick and I am sorry if you covered this I got on the call late, the amortization expenses in the tax rate, I understand that continues for the rest of 2014 but is that something we should expect to see into 2015 as well that higher amortization charge and a lower tax rate?

Irene H. Oh

Most of the additional kind of tax credits that we purchased, Thomas, were for the 2014 year. So if new tax credits are not purchased you will see those are level changed for 2015.

Thomas Alonso – Macquarie Capital

Okay. So the amortization falls back down in the tax rate is back up. Okay. Great. Thank you.

Irene H. Oh

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

Thomas Alonso – Macquarie Capital

Terrific. Great. Thank you.

Operator

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.

Dominic Ng

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

Operator

The conference is now concluded, thank you for attending today’s presentation. You may now disconnect.

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