Earnings Call: Q2 2014

Jul 17, 2014

Good morning, and welcome to the East West Bancorp second quarter 2014 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. 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 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 on 9%, and we grew earnings per diluted share by $0.04, or 7%. We achieved strong profitability with a 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 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 the 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 total $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 deposit by $3.1 billion, or 80%, and we have grown total core deposits by $5.6 billion, or 51%. Non-interest-bearing demand deposit now comprise 30% of our total deposits, an increase 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 am 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 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 systems was completed in June. We are 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 MetroCorp acquisition, which added approximately $1 billion in loans. During the second quarter, our continued efforts to grow C&I loans proved successful with a 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 C&I loan growth in Hong Kong in the first quarter of 2014, total C&I loans in Hong Kong grew approximately $100 million during the second quarter. The C&I loans booked in Hong Kong were largely cross-border trade finance loans. Along with the strong C&I 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 C&I 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 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 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 on our non-covered loan portfolio and the reduction in the cost of deposits 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%-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, and good morning. I'll 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 for 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 of 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 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 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 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 in non-interest income of a negative $57.6 million. Additionally, during the second quarter, the FDIC indemnification asset 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 loans 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 advisory services. Moving on to non-interest expense. Non-interest 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 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 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 costs for transitional employees and termination costs for leases on exited properties. With the completion of the systems conversions, we also consolidated a total of seven branches this 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 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. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Dave Rochester with Deutsche Bank. Please go ahead. Hey, good morning, guys. Good morning, Dave. Hey, just quickly, on the expense side, you mentioned the lumpy increases in legal and amortization of investments in the affordable housing partnerships. Was just wondering how much you expect legal could 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? Yeah, we expect so because of the expense this 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. The amortization line, will that decline as well coming into 3Q? That will decline a little bit because there was a true-up in the second quarter because these have to do with 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, $10 million. $9 million to $10 million. Okay. 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 a case of you are being a little conservative here? Well, I think there are certainly some elements where that is why we give a range, right, Dave? Especially with legal sometimes as well. We do not know exactly what the future will show, so we want to give a range to be a little bit more comfortable. Great, and switching to a fun accounting question, Irene, 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? Yeah. I think the easiest way to look at that is what's the net accretion, the benefit to net interest income minus the write-off of indemnification asset? And this quarter, the impact of that was about $6 million in total positive. Then as discussed in the press release and earlier, we had $8.5 million clawback. So that's, if you add those together, negative $2.5 million. So negligible as far as it benefit impact to earnings in the quarter. 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 a decline in net accretion, and if so, how much of it's coming from that? 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 range of that, too. And 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 like an optical margin headwind or an NII headwind, it is really being completely offset by the clawback expense right now. That is correct. From a bottom line perspective, right? That is correct. Perfect. All right. Thanks, guys. The next question comes from Jennifer Demba with SunTrust Robinson Humphrey. Please go ahead. Thank you. Good morning. You guys have had very strong loan growth in the first half of the year. I am just curious as to how much of that is coming from your new markets in Texas. Well, in Texas, actually, it is not much at all because keep in mind that we closed the MetroBank 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. Provide training on learning about East West Bank's new products that was not available to Metro in the past. So it 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 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 that in the fourth quarter, these leads will generate into funding. Thank you. The next question comes from Joe Morford with RBC Capital. Please go ahead. Thanks. Good morning, everyone. Morning. Good morning, Joe. Follow up on, I guess, loan growth. The cross-border trade finance has been a healthy driver of the growth in Hong Kong. How big 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? 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. 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. If it gets 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 get to a certain size, we decided that it's time to taper it off a little bit. I would look at it as that, first of all, at this point, I don't anticipate any huge surge because of the market or 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 diversified loan portfolio. And, separately, Dominic, there's 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's cracking down on some of this outflow of funds. What kind of impact has this activity had, if any, on your kind of lending and deposit activity or just your markets in general? Well, in terms of lending, it wouldn't have much impact at all. The reason is that, see, most of the cross-border transaction that we do is in the commercial banking side. 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., obviously, we have a pretty big retail franchise. So there may be small depositors that are coming from China that because of the discontinuation of this experimental program in the southern province of China, that may sort of slow down some of the deposit flow into U.S. But I don't think that will make too much of an impact to our retail banking because we have 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, 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 to U.S. Or when we look at some of these companies, they have already set up operation from BVI 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 this sort of 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. Okay. That's helpful. Thanks, Dominic. The next question comes from Ebrahim Poonawala with Bank of America. Please go ahead. Good morning, guys. Good morning. Good morning. 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? The first question in terms of the new hire for Texas, we are continuing hiring new bankers. As of today, we have hired a total of 34 bankers. Now, the majority of them are for the retail branches. But we have, I would say that, 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 we're not only taking on the MetroBank platform and then just 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 trade finance, foreign exchange, things like 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 want to highlight that at this point, one of the key areas that we 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 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. Then we need to train our existing Metro staff to learn the East West Bank banking products and services, and to make sure we 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 that we have a connection with the Metro folks that we brought in. Then we hire new commercial bankers, and we'll make sure the commercial bankers can do really well with the industries and products that we're really good at East West Bank. Then the next phase will be going into look 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. It was about China, hiring in China. Oh, the hiring in China. We continue to hire folks in China. For example, we are opening a new branch in Shenzhen, which is a southern part of China, which is only an hour drive away from Hong Kong. With the new Shenzhen branch, we'll put in commercial banking officers. There's no question that, with that additional branch, we'll see a little bit more growth in China. I think at the latter part of this year, we'll 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 U.S. customers with substantial more convenience because of a much lighter regulation in that area. We also will be looking into hiring more bankers in the Hong Kong office. But we would not be doing anything in an excessive manner. It's always going to be one or two individuals at a time to make make sure they're the right fit, and 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 and then to grow future business. Got it. Thank you very much. I'm sorry if I missed this. Did you say how big the Hong Kong, China portfolio was at the end of the second quarter? I mean? Yeah. In Hong Kong, Ebrahim, we had a total of about 400 or so million in loans. In China, about 250 or so. All right. Thank you very much. The next question comes from Brett Rabatin with Sterne Agee. Please go ahead. Hi. Good morning. Was just hoping to cover some more stuff around loan growth and just thinking about the forward guidance. I kind of realized that you won't have the or maybe the trade finance growth is a little exceptional in Q2. But, I guess 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. Then 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 were finally starting to firm up or if you're still seeing some pressure. Well, in terms of C&I think that 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, well, 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've been looking at the market so far that many banks are taking hit on From overall compliance costs 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 take a much lower pricing. And also on the real estate side, with every 3 months passed, is another 3 months closer to the rising interest rate. While I think for the last 2 years we've seen banks have worked extremely aggressive, taking substantial interest rate risk to make commercial real estate loans, you would think that by some point of time, they also have to sort of take a step back and say that enough is enough. My current prediction is that there's a less likelihood that the very fierce competition that drives down pricing for the last, I would say, 8 quarters or so will continue to go into the same pace. I would think that that would have to eventually slow down. That's my sort of two cents in terms of what I think. That's on the spread. What's the other question? Loan growth. Loan growth. Our loan growth, we always trying to not be too aggressive in terms of our projection, because sometimes projecting too aggressively, we'll just put ourselves in too much pressure in trying to make numbers, and that's not very good. We think that the normal growth is about 400 million USD a quarter or so, and that's what we expected. But occasionally, our staff delight us with good numbers. I think that sometimes, particularly this cross-border transaction in China, it does have a little bit with sometimes the Chinese regulation changes a little bit and help us to move up a lot in terms of the loan growth, and then if it tighten 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, and the country is making reforms on a daily basis and regulation changes night and day in a second. All we try to do is to make sure that we prudently stay ahead of the schedule and then make sure that we do the right thing. 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 that is sort of positive opportunities, 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 growth 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. Is this a CRE or is it one industry from C&I? At this point, it's too early for us to tell, but I hope that we'll have another pleasant surprise in the third quarter. Okay, thank you. The next question comes from Aaron Deer with Sandler O'Neill. Please go ahead. Hi, good morning, everyone. Good morning. Dominic, if you can, some good color around what's going on with C&I, in particular in the cross-border and trade finance area. I'm wondering, also, I think you mentioned that entertainment and private equity has been a contributor to 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 one that contributed together with the trade finance, with the, what I call, the high percentage growth for the second quarter. However, we have other just more generic C&I loans that to 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 come in strong with another quarter. The whole idea that we have is to make sure that we have a very diversified type of industries mix. We're developing the life science industry. We are making decent gain in the agriculture sector. Third quarter, agriculture may come in strong and then surprise us. We don't know yet, but we hope maybe agriculture will be featured next quarter. Beyond that, we do some aviation business from our Seattle office. Obviously, the traditional manufacturing base, and then wholesale distributors is always going to be our sort of bread and butter business, that we have in the C&I side. I'm trying to think what else. Technology and healthcare. Yeah, technology and healthcare. We continue to make investment 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 loan sales, 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 also SBA loans. With the SBA 7(a) program, we're selling what we're originating in the market. With the government guaranteed student loans, earlier we changed a lot of the classification to loans held for sale. So if you look as of June 30, we had about $450 million in loans held for sale. So, 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? I don't have the exact number of the production, but we sold about $20 million. Okay. All right. Very good. Thanks for taking my questions. The next question comes from Gary Tenner with D.A. Davidson. Please go ahead. Good morning, everybody. You had the question earlier about the loan growth out of Texas and whether there was any impact there in the quarter. I'd 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? Overall, I think we actually see nice growth in Texas in terms of deposit. 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 6 months. This is pretty remarkable because we all along anticipate, with every merger that we've done, that's always going to be outflow deposit because that's just natural. That's expected. But clearly, we also have some high cost deposits that we let go. In fact, that's why, as you can see, our cost of deposit 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. But overall, we continue to have organic growth in Texas region, which result in a 10% growth, $125 million just in the state of Texas. Okay. And again, that 10% or the $125 million was since the date of closing, not just the second quarter, correct? That is correct. Yeah. It is year to date, but we closed on the 17th of January. Right. It is pretty much the same thing. Okay, perfect. My other questions were answered. Thanks. Again, if you have a question, please press star then one. The next question comes from Julianna Balicka with KBW. Please go ahead. Good morning. Good morning. 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. Does that imply that you're opening more branches, or are these like product specialist persons that are coming in alongside the preexistent staffing from Metro? I know Metro had a pretty large number of branches for its footprint. Related to that, could you comment on cost savings, whether those are 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, and some of them are specialists. A good example will be, Metro in the past do not have the foreign exchange products. 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. We hire specialists down in Texas to support their new product services that we are providing. We obviously hire new branch managers there 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. Then there are also some of them are just junior level branch staff that have to take care of the branch business. That 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 was substantial reduction of the workforce at this merger. Got it. Is the cost savings that you were 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? By now, yeah. So in the future quarters, it will be the incremental of new hires. Right. Okay. If I may, one more follow-up. On commercial real estate, could you comment about the various trends by property types that you're seeing in geographies around California? Is there anything in particular that you like these days, or is there anything that's getting overheated? Just maybe some bigger picture comments, given your expertise. Well, most of the commercial real estate markets are doing well. I think 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 most of the competitors, they are offering 7 years, 10-year fixed, and we just do not want to offer that 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, we really have not seen any commercial real estate properties in the market region that we have our branch network and so forth that are, I would say, overheated to this point that it get to the point of the bubble about to burst, so to speak. Most of the properties are not cheap, obviously. If you look at New York, San Francisco, Los Angeles, I would say that in general, the property prices 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. So based 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 loan origination due to the fact that, as Julia Gouw just mentioned, the competition is really aggressive out there. Very good. Thank you very much. Once again, if you have a question, please press star then one. The next question comes from Thomas Alonso with Macquarie. Please go ahead. Hey, good morning, guys. Just real quick, and I'm sorry if you covered this, I got on the call late. The amortization expense and the tax rate, I understand that 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 tax credits that we've purchased, Thomas, were for the 2014 year. If new tax credits are not purchased, you'll see those levels change for 2015. Okay, so the amortization falls back down and the tax rate moves back up. That's right. Okay, great. Thanks. We'll give guidance on it given our kind of projections and our estimates of what we have at the beginning of next year for 2015. Terrific. Great. 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. Well, thank you all for joining our call today, and we will speak with you again in October. Bye. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.