Earnings Call: Q1 2014

Apr 17, 2014

Good day, and welcome to the East West Bancorp first 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 a touch-tone phone. 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, EVP and CFO. Please go ahead. Good morning, and thank you for joining us to review the financial results of East West Bancorp for the first quarter of 2014. Also participating on this call 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 provisions 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 for joining us for our earnings call today. Yesterday afternoon, we were pleased to report financial results for the first quarter of 2014, with net income of $76.7 million or $0.54 per diluted share. Net income increased 6% or $4.6 million from the first quarter of 2013, and earnings per diluted share increased 8% or $0.04 from the first quarter of 2013. Excluding the impact of MetroCorp related integration and merger expenses in the first quarter, earnings per diluted share was $0.58 or an increase of 5%, or $0.03 as compared to fourth quarter 2013, and an increase of 16% or $0.08 as compared to first quarter of 2013. Further, we achieved strong profitability with a return on average assets of 1.18% and a return of average equity of 12.05%. Overall, it was a strong quarter. We started off the year by completing the acquisition of MetroCorp Bancshares, Inc., headquartered in Houston, Texas, on January 17, 2014. Further, we achieved solid growth in both loans and deposits. During the first quarter of 2014, we realized loan growth of 10% or $1.8 billion. $1.1 billion was due to the addition of loans from MetroCorp, and $728 million was due to strong growth from the legacy East West portfolio, largely from growth in non-covered commercial and industrial loans. As discussed in our fourth quarter earnings call, our focus for 2014 will be growing the commercial industrial loan portfolio, and our results for the first quarter show good progress towards this goal. Total deposit also increased significantly by 12% or $2.4 billion quarter-to-date, to a record $22.8 billion, including core deposits of $16.4 billion. Through the MetroCorp acquisition, the company acquired deposits of $1.3 billion. Excluding MetroCorp, core deposits increased 7% or $1 billion from December 31, 2013, and increased 21% or $2.7 billion from March 31, 2013. I am also pleased to report that the balance sheet growth was achieved without compromising profitability. Both adjusted net interest income and adjusted net interest margin were up quarter-over-quarter. For the first quarter, adjusted net interest income totaled $209 million, an increase of $10.7 million or 5% from the fourth quarter of 2013, and an increase of $24.3 million or 13% from the first quarter of 2013. Similarly, for the first quarter, the adjusted net interest margin totaled 3.45%, an increase of four basis points from 3.41% for the fourth quarter of last year. Now, I would like to give a brief update on the acquisition of MetroCorp. Since we closed the transaction on January 17, we have been hard at work with integration. As part of the integration plan, we will be consolidating a total of six branches, two in Texas and four in California. The integration process is progressing smoothly, and the full conversion of all MetroCorp systems is scheduled for completion later this. We have had ongoing communications and meetings with MetroCorp customers and look forward to the expanded products and services we will be able to bring to them once they are fully on the East West Bank's platform. In summary, we believe that our solid operating results for the first quarter will serve as a strong foundation for the remainder of the year. Our continued ability to win new customers and grow loans and deposits organically is attributed to our distinct positioning as the bridge between the East and the West. During the first quarter, we received approvals for a new branch location in Shenzhen, China, and a new sub-branch in the recently established pilot free trade zone in Shanghai, China. These two new branches in China are expected to open later this year in the fourth quarter. With our growing and expanded network in mainland China, we expect to have more opportunities to provide our cross-border customers a wider array of banking services and products in both the U.S. and in China. As such, we continue to make investment in people and infrastructure to better serve our customers and strengthen our core capabilities. For these reasons, we believe that East West will continue to deliver strong financial results for the rest of 2014 and beyond. With that, I will now turn the call over to Julia to discuss in more detail our key successes in the first 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 discussing the loan growth we experienced during the quarter, our net interest margin, and our expectations for the future. Finally, I will review the guidance we provided in the earnings release yesterday for the second quarter and the full year of 2014. Our total loan portfolio increased to $19.9 billion at March 31, 2014, an increase of $1.8 billion or 10% from December 31, 2013, which includes $1.1 billion of loans acquired from MetroCorp. Excluding the addition of the acquired loans from MetroCorp, our loan growth for the first quarter was driven by increases in C&I loans, in particular growth in the sectors of large corporates, specialty finance, private equity, technology, and life sciences. Additionally, we experienced solid C&I loan growth in Hong Kong in the sectors of trade finance and cross-border business, corporate, and real estate. This growth in the non-covered C&I loans was approximately 11% or $600 million during the first quarter. During the first quarter, non-covered single-family and home equity residential loan growth was approximately 5% or $190 million. Non-covered multifamily loan growth was 6% or $60 million, and non-covered CRE loan growth was approximately 2% or $75 million. As Dominic discussed, we expect that for the remainder of 2014, growth in the non-covered loan portfolio will largely be focused on C&I loans. Although the growth in the non-covered portfolio will continue to be offset by the expected reductions in the covered portfolio, at this point, 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 March 31, 2014, total deposits reached a record $22.8 billion, an increase of $2.4 billion from December 31, 2013. Through the MetroCorp acquisition, the company acquired approximately $800 million of core deposits and $520 million of time deposits. In the first quarter of 2014, we continued to execute on our long-term strategy to grow low-cost commercial deposits. Excluding MetroCorp deposits acquired, core deposits increased 7% or $1 billion from December 31, 2013, and increased 21% or $2.7 billion from March 31, 2013. The organic increase in core deposits was largely driven by an increase in non-interest-bearing demand deposits of 8% or $447.6 million during the first quarter. I would add that some of this increase in deposits point-to-point from December 31, 2013, to March 31, 2014, came during the latter part of March, particularly in the non-interest-bearing demand deposit category. We do expect outflow in the second quarter as some of our customers have used the funds for tax payments and other uses in the first half of April. Next, I would like to spend a few moments discussing the net interest income and net interest margin for the first quarter and our expectation for the rest of 2014. Net interest income adjusted for the net impact of covered loan activity totaled $209 million for the first quarter of 2014, an increase of $10.7 million for the fourth quarter of last year. The core net interest margin totaled 3.45% for the first quarter of 2014, up four basis points from the fourth quarter of 2013. This quarter-over-quarter increase in the adjusted net interest income and margin largely due to the strong growth in our non-covered loan portfolio and also due to higher yielding loans from MetroCorp and increases in yields in other earnings assets. Additionally, we are pleased to see that for the first quarter of 2014, the average cost of deposits decreased to 30 basis points, down one basis point from the fourth quarter of last year. Lastly, I would like to provide some additional color on our guidance for 2014. As in the past, in our earnings release yesterday, we provided guidance for the second quarter and full year of 2014. We estimate that fully diluted EPS for the full year of 2014 will range from $2.27 to $2.31, an increase of $0.17 to $0.21 or 8%-10% from $2.10 EPS in 2013. We have widened the guidance for the adjusted net interest margin given the unpredictability of the timing of the accretion from the covered loans. Further, we have lowered the estimated effective tax rate for the remainder of the year from 35% to 32% due to the purchase of additional tax credits in the first quarter of 2014. For the second quarter of 2014, we estimate that fully diluted EPS will range from $0.56 to $0.58 per diluted share. With that, I would now like to turn the call over to Irene to discuss our first quarter 2014 financial results in more depth. Thank you very much, Julia. I am going to discuss our financial results for the first quarter of 2014 in a little bit more detail, specifically as it relates to credit quality, non-interest income and expense. I will also summarize the fair value accounting for the MetroCorp acquisition. 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 of $160.9 million or 59 basis points of total assets at March 31, 2014. Non-accrual loans, excluding covered loans, totaled $132.5 million or 67 basis points of total loans as of March 31, 2014, an increase from 62 basis points of total loans at December 31, 2013, largely due to $26.5 million of non-performing loans and assets acquired from MetroCorp. For the first quarter of 2014, the company recorded a provision for loan loss for non-covered loans of $8 million as compared to a provision of $6.3 million for the fourth quarter 2013. East West continues to maintain a strong allowance for non-covered loan losses of $245.6 million or 1.42% of non-covered loans receivable as of March 31, 2014. Total net charge-offs on non-covered loans totaled $4.1 million for the first quarter of 2014, compared to net recoveries of $1.3 million in the fourth quarter of 2013 and net charge-offs of $540,000 for the first quarter 2013. During the first quarter of 2014, the company recorded a reversal of provision for loan losses of $1 million on covered loans. As these loans are covered under loss-share agreements with the FDIC for any charge-offs, the company records income of 80% of the charge-off amount in non-interest income as a net increase in the FDIC receivable, resulting in a net impact to earnings of 20% of the charge-off amount. For all recoveries, the company also shares 80% of the amount recovered with the FDIC. Additionally, during the first quarter, we recorded an expense of $6.8 million as a 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 March 31, 2014, our total recorded liability to the FDIC for this clawback liability for both the UCB and the WFIB acquisitions is approximately $82 million. Moving on to non-interest income and expense, East West reported a non-interest loss for the first quarter of 2014 of $14.9 million, a reduction of loss from a non-interest loss of $36.6 million, and an increase from non-interest loss of $2.1 million in the fourth quarter and first quarter of 2013, respectively. Fee income, including branch fees, letter of credit and FX income, loan fees, and other operating income totaled $28.9 million in the first quarter 2014, a decrease from the prior period of $4.5 million and an increase from the prior year period of $4.9 million. Fourth quarter 2013 fee income was higher than the first quarter 2014 due in part to higher volume of customer transactions in that quarter. During the first quarter, we recorded net gains on sales of loans of $6.2 million, a $2.1 million increase from the prior quarter and a $6.1 million increase from the prior year period. The $6.2 million gain primarily related to the sale of $132 million of government guaranteed student loans and $27 million of SBA loans. We also recorded net gains of $3.4 million, primarily related to the sale of $277 million of investment security. Moving on to non-interest expense, excluding amounts to be reimbursed by the FDIC and merger related expenses. Total non-interest expense for the first quarter was $111.8 million, a decrease of $11.2 million or 9% from the prior quarter and an increase of $15.4 million or 16% from the first quarter of 2013. The decrease in non-interest expense quarter-over-quarter was primarily due to a decrease in legal expense of $9 million, a decrease in the amortization of investments in affordable housing partnerships and other investments of $7.3 million, somewhat offset by a $12.6 million increase in compensation and employee benefits. Quarter-over-quarter, compensation and employee benefits increased due primarily to one-time Metro related retention and severance costs, seasonal increases in payroll taxes, and also a reduction in deferred loan costs. Additionally, I would like to spend a few minutes recapping the MetroCorp acquisition accounting. As discussed earlier, we recorded $10.6 million in merger and acquisition related charges in the first quarter. Of this amount, approximately $6 million was due to termination costs from the MetroCorp system and $3 million was largely due to retention and severance costs. Further, the total loan mark we recorded was approximately 2% of the total $1.2 billion of loans acquired, or $25 million. Finally, we recorded $8.6 million of core deposit intangibles and a total of $121 million of goodwill. Finally, as stated in the earnings announcement released yesterday, East West Board of Directors has declared second quarter dividends on the common stock. The common stock cash dividend of $0.18 per share is payable on May 19, 2014, to shareholders of record on May 2, 2014. I will now turn the call back to Dominic. Thank you, Irene. I will now open the call to questions. Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question is Dave Rochester, Deutsche Bank. Please go ahead, sir. Hey, guys. Nice growth this quarter. Thank you, Dave. A question on that growth going forward. The commercial growth was great this quarter, and it looked like you didn't get that much growth from the resi side, which you've talked about as slowing in the last call. I was just wondering, though, if we should still expect some kind of a seasonal pickup in 2Q in that bucket. Then as we look at 2014 in general, you did $1 billion in growth in that product last year. Are you thinking that comes down a third, a half? How should we be thinking about that growth for the year there? We do also on purpose because of that growth, we feel that the total portfolio is at a size that we don't want to continue at that same growth. As a result, because of the interest rate risk exposure, we no longer offer five-year hybrid ARMs, but instead the maximum is only three years. With that, we won't grow as much as what we had in the past. But I would say that we are comfortable that the total loan growth each quarter is about $400 million, mostly from the C&I. Some will be from the single family and HELOC plus commercial real estate. But majority we would expect would be growth from the C&I portfolio. Okay. I guess just a general question on the loan pipeline heading into 2Q versus what it was heading into 1Q. Are you seeing a similar level of activity there or has it strengthened at all? Well, for the single family and- Not just single family, just overall. Overall, we do see good pipeline, but we don't think that the growth of what we had in the Q1 is going to recur every quarter. That's why we are projecting about $400 million. Got you. I guess switching to the margin, can you just talk about the increases in the yields on the securities portfolio, what actions you took that drove those higher? Secondly, what your appetite is for shifting some of that excess cash you have back into securities, given you had cash basically double on you this quarter. Dave, this is Irene. In general, we're keeping the securities portfolio pretty short. The duration did inch up a little bit from where it was at December 31, but not much. The yield increased, I would say a little bit of what happened. It isn't necessarily optically, obviously, the yield did increase, but we did have some shorter term securities that matured or were called during the quarter, and we used that kind of liquidity during the quarter. Some of that was in cash as you mentioned, as of the end of the year. Got you. Thanks. Just one last one on Texas. Once you complete that integration in June, are you expecting to reposition or build that platform out at all at that point? What do you see as the biggest opportunity in Texas at this point for maybe next year? Well, yeah, that's the whole intent is to first we do things one step at a time, and we believe that by the end of June, we'll have all the system integration issues all put behind us. Once we get our Metro customers on the same East West Bank's platform, we will be able to offer the additional products and then really try to work with the region and try to expand from there. Opportunity is abound in Texas, as you know, it's a fast-growing state. We have branches now in both Houston and Dallas. Interesting enough, the Houston port is also a very active port that do a lot of trade with China, and there are more and more investments coming from China to the state of Texas, particularly in Houston. So it will be more or less following the East West strategic direction. We pride ourselves as a financial bridge between the East and West, and we know the U.S.-China space really well. We expected that we will continue to follow the same theme and pick up commercial banking customers, international banking customers, in the Texas region. All right, great. Thanks, guys. Thank you. Our next question is from Aaron Deer, Sandler O'Neill & Partners. Please go ahead. Hi, good morning, everyone. Good morning. Good morning. You were talking among the different categories within C&I where you're looking to grow. You mentioned private equity, tech, and life sciences. I'm wondering, can you talk a little bit about the nature of those loans and kind of what stage of lending you're talking about and what kind of deal sizes you're doing? On the private equity, we mainly focus on helping private equity funds in their capital call lines. Obviously, when private equity, they work with their limited partners. Whenever they, let's say, make an acquisition or do a transaction, they draw down the working capital line from East West Bank, then after they call the capital from the limited partners, then they pay down our line. It's a very traditional commercial banking activities, and we work with private equity firms throughout the country. That will be a sector that we believe that will continue to grow. The size of the deals varies, but I would say that in general, it's about- 10 to 15 10 million to 15 million size. In the technology arena, I think that it also varies in many different stages. Obviously, for the early stage, we require a lot more, oftentimes, like cash secure and then various kind of forms to make sure that we're comfortable with the credit strength. But then when they get into a much more mature stage, that the company generates substantial earnings, that will have high predictability of earnings, then we will underwrite in a different manner. But it will be at various different stages of technology business. Now, any other- Life science. Life science. It will be very similar, like the technology sector. Aaron Deer, any other industry sectors that you have any questions on? No, that is helpful. Then, with respect to the covered loan book, is there anything that we should be watching for over the next few quarters in terms of unusual pay down activity or indemnification adjustments as you come up to the five-year period on that agreement? No. It will continue to have a rundown just because there are no additional. So far, it looks like the run-off is about $160 million-$200 million per quarter, and we do expect probably similar size. Okay. Very good. I will step back. Thank you. There's no unusual, I think, P&L adjustments. I think that's what you're referring to, Aaron. Yeah. Just if there's anything that we should be watching for that would be unusual from what we've been seeing. No. Okay. We don't expect any. All right. Thank you. Our next question is Jennifer Demba, SunTrust Robinson Humphrey. Please go ahead, ma'am. Thank you. Good morning. Question on the loans you made in Hong Kong during the first quarter. Just wondering if you could give us some more color on those loans and what your thoughts are for growth in future periods. Thanks. What in Hong Kong? I didn't- What type of loans? Mostly- The loans in Hong Kong mainly are trade finance loans and also some large corporate clients that One is large corporate clients that are active in the real estate business. Then there's another one that are large corporate clients that are active in international trade business. But the majority of those C&I loans are in the trade finance area. How big a portfolio would you envision building overseas over the next couple of years? Currently, we have a total of $500 million, $300 million from Hong Kong and $200 million in China. It got plenty of room for us to grow because we have plenty of capital in China that can afford us to grow. But if I look at the pace of growth, China actually had like a 40% growth last year. So relatively speaking, compared with U.S., was much higher. However, the size was small. So I would definitely expect that the pace of growth in Hong Kong and China would be faster than United States in terms of percentage. But in terms of the size, it's still not going to be impactful from an overall point of view. Let me highlight again, when it comes to China and Hong Kong, the intention had never been to aggressively grow that portfolio to create any kind of balance or sort of adverse concentration of our overall portfolio. See, if you look at in U.S., when we saw residential mortgages were growing at a substantially higher pace in 2012 and 2011, it got to the point if I classify residential mortgage as a consumer loans, and then altogether we reached the level of 30% of our portfolio of consumer, another 30-some-odd percent are C&I, and then close to 40% are the CRE, and then a lot of high. It's one-third, one-third. And then we like that because that's a very well-diversified portfolio. And what we're trying to do now is to grow C&I to get even bigger. So eventually, if C&I turn out to be the biggest percentage, that's okay. However, we don't have any intent to make it like the Hong Kong or China become that one-third. The location and our license to practice banking in the Greater China Region is extremely important. Many of our customers that we get from Seattle to New York and then San Francisco to Los Angeles, have to do it because we have a license to do banking business in Hong Kong and Shanghai. We'll continue to grow business in private equity, continue to grow business in the entertainment sector. We'll continue to grow business in agriculture and high tech, life science, et cetera, because of our presence in China, and also because of our knowledge, our specialized knowledge about what's happening in China. That's why we're getting those business. It's critical for our success. But in terms of the needs for Hong Kong and China to suddenly become $2 billion-$3 billion in size, it's not necessary. While that's not necessary, we continue to find growth opportunity. Whenever we find opportunity to have very solid commercial clients that we can do business with in Hong Kong or Shanghai, we'll make sure that we'll bring them on as another East West Bank client. Then by the time we open our Shenzhen branch, in the fourth quarter of this year, I'm pretty sure that we'll end up bringing more commercial customers from that region. Again, we'll continue to grow that portfolio. It's never going to be, I think, in the next few years, that will be a very substantial or material number to our overall financial, but it will continue to be very impactful from a strategic point of view. Thanks very much. Our next question is Joe Morford, RBC Capital Markets. Please go ahead. Mr. Morford, RBC Capital Markets, please go ahead. Yes. Thank you. Thanks. Good morning, everyone. Good morning, Joe. I guess just following up on that, can you talk about the new branches that you're opening in China? What's the motivation behind that? Is it a geographic filling out the footprint, or is it specifically targeting a special customer base, or, I don't know, just how does it fit in with the overall strategy in China? Yeah. Actually, a few different reasons. One is that geographically, Shenzhen is one hour driving time from Hong Kong. We already have our full service branch in Hong Kong since 2005. We actually feel that just strategically, that geographic location will make it very good for us because the Hong Kong office also can help out the Shenzhen branch and vice versa. That's very important. Well, of course, Shenzhen is one of the largest international city in China, and that's also important, too. The other side is that customer base. Currently in U.S., particularly in the L.A. region, we have many customers from China that are originally based in Shenzhen. They have headquarters in Shenzhen, and they came to L.A. and expanding into U.S. and start doing business here, and many of them became our clients. It just naturally that we wanted to be in the Shenzhen region, connecting with these clients that we already know well in the United States. Third, Shenzhen is a city in not only that it's a mecca for a lot of the exporters from China who are doing all the manufacturing and shipping a lot of the widgets, like from toys to furnitures and electronic products, which is what I call the Traditional lion's share of the international trade finance business is right around within an hour or two hours' drive from Shenzhen. There's another new phenomenon that's happening in Shenzhen is that it's really the mecca for the telecommunication social media business. All the large social media business like Tencent or telecommunication business like ZTE and TCL, all these companies, or clean tech company like BYD, they're all based in Shenzhen. I think that it's just going to be more like the growth industries city. We feel that an area like that and with so much more connected business with U.S., it makes sense for us to have a branch there. Do you staff that with people who are coming out of your Hong Kong office, or how have you gone about recruiting to bring someone in to head that office? No, I think at this point, we have transferred the head of our Beijing office to Shenzhen, so she will take over as the branch manager by the time it is open, let's say, in the fourth quarter of this year. We will recruit people locally, and in addition to recruiting people locally, we are always looking to opportunity to transfer people both from U.S., Hong Kong, or Shanghai. East West is very much into moving our staff around all over the places, and we encourage our staff to go from one area to another. So I think we will be a mix of transfer from U.S., transfer from other cities in the Greater China region, and then also local hires. Okay, that is helpful. The other was just a follow-up on, you referenced large corporate lending a couple times within C&I. How big would you say your large corporate portfolio is? For the customers there, how much do you have broader relationships with those customers, and how much is, say, just more participations in credits? This one in Hong Kong, specifically Hong Kong because we do not have much large corporate relationship in Shanghai at this point. But in Hong Kong, actually, one is a line of credit with the customers. The other one is working on a transaction with another client. Neither one of these deals are huge in size. They are large corporation. They can actually afford to take on much bigger line of credit. But the specific relationship they work with us, both of them desire to work with East West because of our U.S. connections, which is distinctly different than the local banks that they work with. They have plenty capacity to do a significant size with them. But on these two loans, Irene, what is the size of these two loans? They are ranging from about $12 million to $20 million. Yeah, $12 million to $20 million. So it's not a big size deal. That's pretty much our sweet spot in terms of we try and we said it many times at the different conference calls is that we do not like to do deals above $20 million. Right. Okay. That's helpful. Thanks so much. Thank you. Our next question is Juliana Balicka, KBW. Please go ahead. Good morning. Good morning. Good morning. About loan yields. Oh, you are cutting out, Juliana. Can you repeat the question? Looking at your loan. We cannot hear you, Juliana. You are in and out. Looking at your linked quarter increase in covered loan yields, you had mentioned in your remarks that that was attributable to MCBI. Can you talk a little more about whether that is entirely from MCBI, or what is the loan yield on the MCBI portfolio, and how much of the loan yield on the MCBI portfolio is their core loan yield versus any discount accretion that might be coming in for something like that? Ju, I did not quite hear all of your question, but I think I will answer it accordingly. If I did not answer the full question, just let me know. The total discount that we took on the Metro portfolio was 2%, so it really was not very high. If you think about accretion on a go-forward basis, part of that is a credit mark. It is very little, and it makes really a very de minimis impact as far as aside from the coupon the customer is paying. When we look at on a linked quarter basis from the fourth quarter to the first quarter, I would say that largely, the increase in the yield on the non-covered loans came from the Metro loans. Metro loans, the coupon on the loans that we acquired was about 4.9% or so it was higher than the legacy East West portfolio. That is a large reason for the increase in the non-covered loan yields. When we think about where that loan yields are going to go to, how much of the Metro 4.9% has already repriced kind of down to current interest rates versus as a 5 or 7-year kind of CRE loan that has yet to price down? Do you know what I mean? They price some. There are definitely some that are going to price down. I think that will naturally happen, Juliana, and that's something that we have factored in. Okay. On the non-loan yields, the other earning assets, you had talked about this quarter having sold some of the or some of the securities had matured, and you had redeployed some cash. When we think about the rest of the year, are you also factoring in additional redeployment of your other earning assets? Should we be looking for some incremental yields from that side, too? We'd have to take a look and see what happens on a quarterly quarter basis. I think that that would depend on the kind of the liquidity deposits that we have, the opportunities to redeploy, at what rates, et cetera. Okay. Very good. Thank you very much. You are welcome. Our next question is Ebrahim Poonawala, Bank of America Merrill Lynch. Please go ahead. Good morning, guys. Good morning. Good morning. I just had one follow-up question in terms of, Dominic, your comments around the commercial loan growth and on what you mentioned on the tech, private equity, and life sciences side. Has the impact from the recent sell-off that we have seen in the tech space, has that led you to lower your expectations when you think about growth in those segments over the coming quarters versus maybe what you expected two months ago? Or is the activity essentially still very much where it was maybe 60 or 90 days ago, despite the volatility we have seen in the markets, in the IPOs, on the IPO side as well? Oh, we wish we were that dominating in the tech and the biotech sec- The social media. Oh, the social media sectors to have an impact to us. We still, I would say, our exposure, because as you know even with our total portfolio of all the loans combined, it's only a little bit over $19 billion, and then C&I is just one-third. The tech side out of the overall is probably a very small percentage. Because of that limited size, we always find business to do, and we really, quite frankly, are not active at all into these, what I call pre-IPO type of situation. Yeah, occasionally, we end up getting into a client that we have a line of credit with, and then a few months later, they go into an IPO, and then because of all the excess liquidity, they have to pay us off. We had a few of those occasions in the past. But I would say that overall, the volatility of the stock market at this point and all the IPO sectors and so forth really don't have that much impact to our commercial banking business in the tech or the private equity side. I think, frankly, it all gets back down to, there's just not many people out there that have a very strong knowledge on the U.S.-China business. But there are just enough, from tech to private equity firms that do need to do business in the Greater China region and find our advices to be much more valuable, and therefore, move some of the banking relationship to us because they find us to be much more helpful as a banker than just another bank asking for a loan. So in that regard, I think that we'll continue. As this global economy continue to expand, and as U.S. and China continue to have very healthy trade and investment cross-border business going back and forth, we expect that East West will continue to gain market share one at a time. But very specifically, because our value proposition is unique. As long as there are people who recognize our value proposition, the likelihood of them moving the banking relationship with us is very high. So in general, we are a little bit more immune from the overall market conditions, simply because the clients who come for us are specifically looking for something that, in general, are not offered by most of our peer banks. Understood. Thanks a lot. One follow-up question in terms of the growth in China. Is this growth predominantly relationships that you're sort of cultivating in Hong Kong and Greater China, or are these relationships that you had in L.A., and they're sort of translating into a growth there because of your presence in both markets? Most of them are cross-border relationship. That is that many of them is because they have business in U.S., that we get to know them in U.S., and then we end up doing some more business with them in the Greater China region, Hong Kong or Shanghai, or vice versa. Then with some of the others is that because our Hong Kong and Shanghai office met with these people in that region, then they would make requests about this. "Oh, now I know that you have a very healthy bank in United States," and in the regions that they actually are doing business. They say, "We have a request in U.S., maybe you can help us to do something like that." So that's pretty much the core of our business. That's also the reason why we are not going leaps and bounds there in a way, because we are looking mainly to connect the U.S.-China business. We are not out there in, let's say, in China and say that, "Look, that's 1.3 billion people there, consumers there. Let's go ahead and try and go after every one of them one step at a time." We never had intention when we started there in 2009, and we still don't have any intention to sort of capitalize on the local consumer market over there. Our plan is to continue to stick with what we do best, is that when it comes to a business in China who is looking for expanding in United States and looking for advice, we are very good at it. That's what we want to stick with what we're good at, and the likelihood we're getting these clients to appreciate our service is substantially higher than we go into China, know nothing about the business over there and trying to make loans to these, from state-owned enterprises or to some of the private sector, private entrepreneurs. If we are not familiar with those business over there, we're not as familiar with the local sometime regulation of policy, then the risk for us to get in trouble is much higher. So that's why we never really trying to make an attempt to do too much on these local business. We more or less just keep focusing on connecting with U.S. customers who are doing business in China, Chinese customers doing business in U.S., then so far so good. Got it. Thank you very much. Our next question is Gary Tenner, D.A. Davidson. Please go ahead. Thanks. Good morning. I just had a follow-up question regarding the yields in the MetroCorp book of business. I think you had mentioned around 4.9%. Can you talk about the relative difference in pricing within that franchise in California versus Texas, and how you see the Texas part impacting the overall book over time? Well, I think in general, when we look at Metro, the pricing was different in Texas versus their franchise in California. Obviously, Gary, the bank, Metro United Bank in California was much smaller and sometimes they have to price up as far as, especially on the deposits, on the funding side to attract the core customers. As we kind of talked about earlier, over time, I think when we look at the pricing on the loan side and the yields, one of the reasons that the yields are a little bit higher on Metro and the loans that we acquire than our legacy portfolio is that they are kind of longer ARM products than what we have. Over time, we do expect that will reprice downward as we're going to kind of institute our current philosophy, which is we are not willing to take on too much interest rate risk in the next couple of years, right before it looks like rates are going to go up. I would say on the loan side, we do expect that yield to come down over time. And then on the funding side as well, the cost of deposits combined for Metro United Bank, probably about 45 basis points on the cost of deposits, quite a bit higher than us. Over time, we expect to reduce that as well, particularly in the California area where the branches are very much kind of absorbed by the East West platform. Thanks for that. Just regarding the six branches you said were targeted for consolidation, are those already shuttered, or will that happen when you convert the systems in June? When we do the conversion, because that would be the better timing of it. Okay. Thanks very much. As a reminder, if you wish to ask a question, please press star then one. Our next question is Brett Rabatin, Sterne Agee. Please go ahead. Hi, good morning, everyone. Good morning. I wanted to ask about fee income. You usually have somewhat of a seasonal quarter in 1Q from a letter of credit perspective. I was just, I guess first, just curious if we might see the rebound in that line item in the second quarter going forward, and then if fee income was where we might also see some of the wider array of services you mentioned in China showing up over the next year or so. Brett, I think at this point, the results for the first quarter, around $28 million or so, that is what we are projecting for the run rate for the remainder of this year. As a kind of reminder, we did kind of talk about how in fourth quarter last year, there was kind of a lot of volume of activity from the LC/FX side, and then also from swap fee income, which is in the other line item for us. I think that that was probably a little bit higher, and that $28 million is probably a better run rate on a go-forward basis. Okay. And then also was just curious, I realize you have to be somewhat conservative around margin guidance given the accretion that you have, but was curious just given the margin guidance, if you could maybe talk about the progression of loan yields as you expect them, without any change to Fed funds rates or rates in general, if you're expecting what kind of decline over the next few quarters in terms of loan yields? I think the loan yield has been stable the last especially for the legacy East West, only because most of our loans have repriced to current rates. We do expect the loan yield to be somewhat stable. But in term of the accretion in quarter by quarter, that amount can be different. That's why we provided a wider guidance on the margin. This quarter, Brett, the impact of the accretion, net of the write-off of the indemnification asset, was a little over $6 million to the adjusted net interest income number. That translates 10 points on the margin. It's quite a bit different. That's one of the reasons why, as Julia had mentioned in the prepared remarks, that we did kind of expand the margin guidance because as you can see, we're not very good as far as being able to predict exactly when that accretion's going to happen. Given your outlook for stable loan yields, would it be fair to say, aside from the discount accretion noise, that maybe the margin would be on kind of a stable run rate? I would say so. Yes. Mm-hmm. Okay. Great. Thanks for all the color. You are welcome. Our next question is a follow-up. Aaron Deer from Sandler O'Neill & Partners, please go ahead. Hi. Yeah, just a quick follow-up, Irene, on your guidance for the non-interest income. I was just curious, I know that there was a pretty significant amount of loans held for sale at period ends. I'm just wondering kind of what your expectations are for loan sales and the impact that that is going to contribute to your non-interest income guidance. Yeah. From time to time, as you have seen, we do sell loans. As of this quarter, the loans that we sell have largely been government-guaranteed student loans, and then also 7(a) SBA loans that we originate, and we sell the guaranteed portion of those. We did transfer some loans held for investment to held for sale, and those were government-guaranteed student loans. Since we have purchased these loans at a discount, I would say that there really was not a P&L impact for this classification. It is really just a balance sheet reclass. During the quarter, what we experienced was that we got attractive pricing on the government-guaranteed student loans, more attractive pricing than we have actually gotten in the past. We thought it made sense to reclass these. We will look at it. It does not necessarily mean we are going to sell them all in one period. That is not the intention, but over kind of the long run, we do expect that we will be selling these. Okay. That is helpful. Thank you. You are welcome. Our next question is a follow-up. Juliana Balicka from KBW, please go ahead. Hi. I just have a quick follow-up. In terms of your EPS guidance for the year, the $2.27 and the $2.31 range, other than the $0.04 of merger charges this quarter, are there any integration or other merger charges that we should think about for the rest of the year in kind of getting to an operating EPS number in terms of guidance? There will be some additional costs. Integration and related costs. But later, there will be also reduction for the people that are no longer. Transition employees needed, yes, the transitional staff. So nothing other than the $0.04 from this quarter that will stand out? There will be a little bit more, Juliana. It is hard to say exactly, but I would guess right now probably $1 million, $1.5 million. Got it. Thank you. Having no further questions, this concludes our question and answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks. Well, thank you for joining our call today, and I look forward to speaking with you all in July. Bye-bye. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.