Earnings Call: Q4 2013

Jan 23, 2014

Good morning, good afternoon, or good evening. Welcome to the East West Bancorp fourth quarter 2013 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please contact the 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 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 Ms. Kelly Adams, the Senior Vice President. Please go ahead. Good morning, and thank you for joining us to review the financial results of the East West Bancorp for the fourth quarter and full year of 2013. Here to review the results are Dominic Ng, Chairman and Chief Executive Officer, Julia Gouw, President and Chief Operating Officer, and Irene Oh, Executive Vice President and Chief Financial Officer. We will then open the call to questions. 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, 2012. 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, Kelly. Good morning, and thank you for joining us. Yesterday afternoon, we were pleased to report financial results for the fourth quarter and for the full year. 2013 was another year of record earnings for East West, and we achieved many financial successes. East West reported strong earnings of $75.8 million or $0.55 per diluted share for the fourth quarter. We increased full-year net income by 5% or $13.4 million to a record $295 million from $281.7 million in 2012, and increased earnings per diluted share by $0.21 or 11% from $1.89 in 2012. In 2013, we achieved the highest net income in the history of the bank, grew loans and deposits to record levels, and experienced strong improvements in credit qualities while maintaining good operating efficiency. Also in 2013, our stock price increased over 62%. Our market capitalization was increased to over $4.8 billion as of the end of the year. We also increased common dividends by 50% during the year and bought back $200 million of stock, returning a total of $283 million or 96% of 2013 net earnings to our common shareholders. Additionally, we were pleased to announce yesterday a further increase to our annual common stock dividend to $0.72 for 2014, up 20% from last year. During 2013, we grew total loans by 20% or $3 billion to a record $18.1 billion. Our loan growth was broad-based and came from C&I loans, commercial real estate, and residential loans. Additionally, total deposits grew nicely at 11% or $2.1 billion year to date to a record $20.4 billion, achieved through healthy growth in low-cost commercial deposits. In 2013, net income totaled $295 million, which is the fourth consecutive year of record net income for East West. Once again, our annual return on equity and return on assets ratios were both above many of our peers at 12.59% and 1.25%, respectively. This strong financial performance was accomplished through quality execution on all significant fronts, including loan and deposit growth, operating expense control, and maintaining strong credit quality. During the fourth quarter, we announced the acquisition of MetroCorp Bancshares, Inc., and we closed the merger at the end of business last Friday. MetroCorp is a strategic acquisition for East West and allows us entry into the new markets of Dallas and San Diego and a substantially increased presence in Houston. As of December 31, 2013, MetroCorp had $1.6 billion of total assets, $1.2 billion of loans, and $1.3 billion of deposits. The final consideration we paid for MetroCorp was 1.63 times tangible equity, or a total of $268 million. This translates to $14.33 per share, with two-thirds of the consideration in East West stock and one-third in cash. We welcome our new employees and customers to East West, and we look forward to offering our expanded services, platform, and branch network to MetroCorp customers. East West has a long history of successful acquisitions and system conversions. The integration plans are well underway for both Metro Bank and Metro United Bank, scheduled to be completed during the end of the second quarter this year. Also, in late December 2013, we opened a new branch in Las Vegas, our first in the state of Nevada. Over the years, we have developed many commercial banking relationships in the Las Vegas region and are optimistic about our ability to generate profitable and sustainable commercial clients in Nevada as well. As we start 2014, we are excited about the future opportunities East West has to grow our business and generate strong returns for our shareholders. Although the business environment for the banking industry continues to be challenging, with the ongoing low interest rate environment and regulatory changes, we are confident that East West will continue to perform well. In 2013, we had strong organic growth and also were able to complement our organic growth with a strategic and financially compelling acquisition. Our strong organic growth stems from our distinct positioning as the bridge between the East and the West. Globalization is increasing bilateral trade between the U.S. and China, and we see more and more opportunities for East West to provide a unique value to our customers in this sector. We have positioned ourselves to be the natural leader in providing cross-border banking services to customers in the U.S. and China. We will continue to make investments in people and infrastructure to better serve our customers and strengthen our core capabilities. Our strong financial results in 2013 reflect the opportunity East West has and our ability to execute successfully. For these reasons, we believe that East West will be able to continue to deliver strong financial results in 2014 and beyond. With that, I will now turn the call over to Julia to discuss in more detail our key successes in the fourth quarter and also discuss our expectation for 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 first quarter and the full year of 2014. Our total loan portfolio increased to a record $18.1 billion at December 31, 2013, an increase of $879.3 million or 5% from September 30, 2013, and an increase of $3 billion or 20% for the full year. The loan growth for the fourth quarter was driven by strong diversified loan originations throughout the bank. Increases in commercial loans continued to drive our total loan growth with non-covered commercial and industrial loans and commercial real estate loans up 10% or $478.8 million and 4% or $172.5 million respectively. Single-family residential loan growth continued to be robust during the fourth quarter of 2013, increasing 6% or $192 million quarter to date. During the fourth quarter, we originated approximately 940 single-family residential loans totaling $350 million, with an average loan size of $370,000 and an average loan-to-value of 53%. Although still very strong, residential loan originations are down in the fourth quarter as compared to the third quarter, in line with industry trends. In the coming year, we do expect that the origination volumes will be lower than in 2013. Although the growth in the non-covered portfolio will continue to be offset by the expected reduction in the covered portfolio, at this point, we project that we can grow total loan portfolio by 8%-10% through the end of 2014. Along with strong growth, we have continued to successfully acquire new commercial deposit relationships, resulting in healthy core deposit growth. Total deposits increased $53.8 million during the quarter to a record $20.4 billion due to the growth in core deposits to a record $14.6 billion. The strong growth in our core deposits was fueled by an increase in non-interest-bearing demand deposits. As of the end of the year, 29% or $5.8 billion of our total deposits were non-interest-bearing demand deposits, the highest ever in the history of the bank. Next, I would like to spend a few moments discussing the net interest income and net interest margin for the fourth quarter and our expectation for 2014. Net interest income, adjusted for the impact of covered loan activity totaled $198.2 million for the fourth quarter of 2013, an increase of $5.9 million from $192.4 million in the prior quarter. The core net interest margin, including the net impact of $66.8 million to the FDIC indemnification assets due to the covered loan activity and amortization of the FDIC indemnification assets totaled 3.41% for the fourth quarter of 2013, down 3 basis points from the third quarter of 2013. The small compression in the core net interest margin compared to the prior quarter was largely due to the decrease in the adjusted yield on the covered loans from 7.7% in the third quarter to 7.18%. Additionally, for the fourth quarter of 2013, the average cost of deposit increased slightly to 31 basis points, up 1 basis point from the third quarter. Overall, we had a strong quarter and another record-setting year. We increased net interest income slightly, lowered deposit costs, and maintained good expense control while substantially increasing loans and deposits to record levels. We feel confident that we are building lines of business and making operational improvements that will benefit us for many years to come. 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 first quarter and full year of 2014. We estimate that fully diluted earnings per share for the full year of 2014 will range from $2.24 to $2.28, increase of 14 to 8 cents or 7% to 9% from $2.10 for 2013. For the first quarter of 2014, we estimate fully diluted earnings per share will range from $0.49 to $0.51. We currently estimate that the one-time merger-related charges resulting from the acquisition of MetroCorp will be approximately $7 million after tax, or $0.05 per share. The guidance for the first quarter of 2014 and full year includes the impact of these one-time charges. Including the impact of the $0.05 of merger charges, we currently estimate that the MetroCorp acquisition will be approximately $0.02 accretive to 2014 earnings. Additionally, as discussed by Dominic Ng, we expect to complete the integration of both Metro Bank and Metro United Bank before the end of June of this year. Since MetroCorp operated 2 different banks, we will have to undergo 2 separate conversions. As such, we do expect higher operating costs until the integration of the 2 banks into East West is completed, and therefore, we anticipate the cost savings to occur in the second half of the year. With that, I would now like to turn the call over to Irene Oh to discuss the fourth quarter and full year 2013 financial results in more depth. Thank you very much, Julia, and good morning to everyone. I'd like to discuss our financial results for the fourth quarter and full year of 2013 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, has been under 1% for over 4 consecutive years, with non-performing assets of $130.6 million or 53 basis points of total assets at December 31, 2013. Non-accrual loans, excluding covered loans, totaled $111.7 million or 62 basis points of total loans at December 31, 2013, a decrease from 72 basis points of total loans at December 31, 2012. For the fourth quarter of 2013, the company recorded a provision for loan loss for non-covered loans of $6.3 million, as compared to a loan loss provision of $13.8 million for the fourth quarter 2012. For the full year 2013, the provision for loan losses for non-covered loans was $18.3 million, a decrease of $41.8 million or 70% as compared to the year-ended 2012. East West continues to maintain a strong allowance for non-covered loans of $241.9 million or 1.54% of non-covered loans receivable at December 31, 2013. Total net recoveries on non-covered loans totaled $1.3 million for the fourth quarter of 2013, compared to net charge-offs of $334,000 in the third quarter of 2013 and $9.6 million of charge-offs in the fourth quarter of 2012. During the fourth quarter of 2013, the company recorded a reversal of provision for loan losses of $820,000 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. Additionally, during the fourth quarter and full year of 2013, we recorded an expense of $8.9 million and $49 million respectively 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 December 31, 2013, our total recorded liability to the FDIC for this clawback liability for both the UCB and the WFIB acquisitions is approximately $75 million. Moving on to non-interest income and expense. East West reported non-interest loss for the fourth quarter of 2013 of $36.6 million, a decrease from a non-interest loss of $41.4 million and an increase from a non-interest loss of $18.5 million in the third quarter of 2013 and fourth quarter of 2012, respectively. For the full year, the company recorded non-interest loss of $92.5 million, an increase in non-interest loss from $5.6 million in 2012. Additional loss for the year is due to changes in the net reduction of the FDIC indemnification asset and FDIC receivable. In total, fee income, including branch fees, letter of credit, and foreign exchange income, loan fees, and other operating income totaled $33.4 million in the fourth quarter of 2013, an increase from both the prior quarter and prior year periods. During the fourth quarter, we recorded net gains of $4.1 million on the sale of $110 million of government-guaranteed student loans, a slight increase from the third quarter, and $3.9 million increase from the prior year period. Moving on to non-interest expense. Total non-interest expense for the fourth quarter, excluding amounts to be reimbursed by the FDIC and prepayment penalties on FHLB advances, increased to $25.3 million or 26% from the third quarter of 2013, and increased by $24.9 million or 25% from the fourth quarter of 2012. The increase in non-interest expense quarter-over-quarter was primarily due to an increase in compensation employee benefits of $5.2 million, an increase in legal expense of $3.8 million, and an increase in the amortization of investments in affordable housing partnerships and other investments of $8.5 million. The increase in compensation and employee benefits compared to the third quarter of 2013 was largely due to an increase in employee headcount that is commensurate with the growth we have experienced and a related increase in bonus accruals. Legal expense increased $3.8 million or 42% compared to the third quarter due to increased legal costs and the resolution of outstanding litigation. The increase in the amortization of investments in affordable housing partnerships and other investments of $8.5 million was primarily due to two investments we made during the fourth quarter, where the associated tax credit was primarily for the 2013 tax year. During the quarter, amortization expense on these investments increased, but was more than offset by lower income tax and lower effective tax rates during the quarter. Additionally, during the fourth quarter, we increased long-term debt to $226.9 million, up from $187.2 million as of September 30, 2013. The increase in long-term debt during the fourth quarter resulted from an additional $50 million advance on a term loan entered into by the company, partially offset by $10 million of higher-cost junior subordinated debt that was called during the fourth quarter. Finally, as stated in the earnings release yesterday, East West Board of Directors has declared first-quarter dividends on the common stock. The common stock cash dividend of $0.18 is payable on February 18, 2014, to shareholders of record on February 3, 2014. This represents an increase of $0.03 per share or an increase of 20% from the prior quarterly dividend of $0.15 per share. 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 touch-tone phone. 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. Our first question comes from Julianna Balicka of KBW. Please go ahead. Hey, good morning. This is actually Dave Rochester going for Julianna Balicka. Hi, David. Wow. We have Julianna's voice changed so much. I just had a question on the dividend increase. Thinking about future dividend increases, do you have a target dividend payout ratio that you target to, or would that be kind of in line with EPS growth in the future? Well, we have some guidelines. We think that a dividend payout of 30%-35% seems to be a good dividend payout, and depending on the growth, we'll take a look whether we continue to accumulate capital or we need the difference to support our growth. But we would like to see that if we increase our EPS every year, that we can continually increasing our dividend each year. Okay. Any thought on repurchases now that MCBI has closed? Well, at this point, I would say that because our capital ratio is at the level that we are very comfortable with, and also we're looking at where we are in terms of our growth plan. We don't think that it will be the best use of our capital to do buyback at this point. Okay, thank you. Also a question on the loan growth guidance for 2014, the 8%-10%. Just want to confirm that does not include any MCBI, so it's based on the total loans from 12/31/2013, right? Correct. Yeah. Yeah, because MCBI, at the Metro Bank, we already picked up $1.1 billion of loans as of December 31st. That is not included in the 8%-10% growth. The 8%-10% will be strictly the East West organic growth on a net basis. Yeah. Okay. That's all I had. Thank you very much. Thank you. Our next question comes from Ebrahim Poonawala of the Bank of America, Merrill Lynch. Please go ahead. Good morning, guys. Good morning, Ebrahim. Just had a quick follow-up question on loan growth. One, just in terms of, obviously, your guidance implies a slowdown relative to the kind of growth we've seen for the last three quarters. Just wanted to get a sense in terms of specific, I know you mentioned, Julia, in your opening remarks that originations are going to be lower for 2014 versus last year, but wanted to get a sense of what areas you see growth slowing in, and are you being conservative? Because it seems like what we're hearing from other banks, especially on the commercial side, that things are picking up, so loan growth could actually strengthen as we move into 2014. I would appreciate if you can give any color around that. In terms of our projection, we looked at a few different scenarios. One is what the market condition, the other one is East West's balance sheet. If we looked at what we've done for the last two or three years, particularly on the residential mortgage origination, we have done extraordinarily well, because the market allowed us to be able to book a lot of very low loan-to-value, very nice yield type of residential mortgages. But we got ourselves in the situation now that we actually have a pretty nice balance of residential mortgage. If you look at the residential mortgage balance today, as a percentage, it's at the level that we looked at it, is that if we continue the same volume of growth, it's not going to be conducive to our principle of having a well-diversified portfolio with a different mix of different type of products. Within the East West situation, we wanted to not have this kind of repeat of 2013 of residential mortgage growth anyway. You look at the market condition. I think in general, last year, because of the rate environment, many banks who originate home mortgages were all doing very, very well. We are no exception. We just don't expect that the market will be as strong as it was in 2013. We expect the market to slow down. Within our own balance sheet diversification and risk oversight purpose, we also do not want to see that much growth. As a matter of fact, what we've done also is that we have also changed our product mix in the home mortgages area. In 2013, we offer three-year fixed rate, five-year fixed rate. This year, we decided, in fact, it is not only this year, actually, in the middle of fourth quarter, we decided that in order to curtail some of the growth, we will only offer 3 years fixed rate. That is also for interest rate reasons. Because if you looked at the likelihood of rate going up, like maybe by 2015 or something like that, is now much higher because we have been having this almost zero interest rate environment for the last 5 years. We think that it is about time that rate will eventually go up. We decided that rather than like 3 years ago when we offer 5 years fixed, that was a good move for residential mortgage because we pick up nice yield, low LTV, and also we do not expect that there is going to be that much of a likelihood of rate going up. Then moving forward in 2014 and 2015 and 2016, for us to offer a 5 years fixed right now, we do not think that it is very smart for interest rate, sort of like asset liability management, so to speak. In that regard, we decided to go only a 3 years fixed, and I think that will definitely reduce some of the volume. It is a combination of us offering products that may likely to reduce the volume, and we already have a pretty full plate of residential mortgages, and our expectation is the market will be slowing down. All the combination, we expect that the residential mortgage growth will not be as strong. On the commercial real estate side, what we have seen is that for the last year, particularly, a lot of smaller community banks finally came out of MOU and C&D. Many of them, their first marching order was to originate commercial real estate loans. In order to be able to do more, and in order to get the yield that they wanted to get the earnings that they need, many of them are doing fixed rate, 5 years, 7 years, 10 years, sometimes even 15 years fixed rate. Again, we at East West Bank, with our loan growth, with our earnings, with our very efficient operation, we do not think that we need to take the next potential ticking time bomb, which is interest rate risk. Instead of going out there and compete aggressively and also offer these long-term fixed rate loans, which we will regret 4-5 years from now, we have been holding off and continue to originate mainly adjustable rate mortgages. If we do any fixed rate, we do an interest rate swap with it. With that, we also do not expect that we will have a very aggressive high growth in the commercial real estate. The areas that we expect high growth will continue to be on the C&I and also our international cross-border transaction, trade finance, and areas like that. That is the area we think that we can take on more. These are long-term, profitable, sustainable relationships. When we book a good C&I loan today, 3 years from now, if the business continue to grow, we automatically grow with it. We like that kind of business, and we can afford to take on more, and all of them are adjustable anyway. We are going to put most of our focus on C&I. What we look at is that with payoff and from the loss share loans and so forth, net net, even if we have a very high growth in the C&I portfolio, chances are it may come back down to about 10% on a net basis without considering the Metro Bank side. That's why we come up with our projection. Got it. Thank you very much. I guess just a second question around, I appreciate your comments, Dominic Ng, around not really viewing buybacks as the best use of capital. I guess as you look in terms of capital deployment in 2014 and with your entry into Vegas in the fourth quarter, do you see additional M&A opportunities? Would it be within footprint or could you go into newer markets as well? Well, in terms of the M&A, we have always taken the position is that, again, East West, we have a pretty strong organic growth engine. We can do without M&A for years and still be able to grow faster than many of our peers. From an M&A perspective, we have always been under the principle is that, well, the deal has to be very attractive from a financial point of view, and also the deal has to be very attractive from a strategic point of view. We have the capacity, we have the human resources that can take on another acquisition anytime, any day. However, we would not do acquisition for acquisition's sake. At this point, I would say that, and just like I said in the last few years, the likelihood of acquisition is relatively low. Sometimes while I'm saying that there's highly unlikely that we'll do an acquisition, suddenly we end up doing one. It all depends on, in a very opportunistic way, we will always be looking out for good deals. If we find one, we'll jump into it. But if we don't, we're going to continue to focus on what we do best, which is we know we are one of the best in terms of helping U.S. China business to do business together. Then in between, we are providing banking services. Those are kind of things that we will continue to make sure that we'll improve our platform capacity, our product mix, and so forth. Then I think that there's still going to be plenty of room for us to grow. Got it. Thank you very much for taking my question. Thank you. Thank you. Our next question comes from Dave Rochester of Deutsche Bank. Please go ahead. Hi, good afternoon. This is actually Timur Braziler filling in for Dave. First question's on NIM guidance for this year. It's a pretty big drop from the 4Q NIM of 3.41. I was just wondering if you think the pressure is going to be more front-end loaded, or are you expecting a progression throughout the year? Yeah. This is Irene. I think it will be throughout the year. The guidance that we did give out is for the entire year of 2014, not necessarily the first quarter. But when we talk about the drivers for the NIM, I would say it is a couple of things. One, certainly when we look at 2014, we do not expect the same amount of accretion income that we had even in 2013, which was also a lot less than 2012. In fact, when we look at the fourth quarter as well, one thing that is positive is if you look at the impact of all the accounting income related to loss share SOP accounting, it nets to about zero. That, as you may recall, was about a negative $2 million in the third quarter. So we are at the point right now when the earnings really are core earnings, although it is still a little bit confusing as there is a growth up in the income statement. Next year when we look at kind of the drivers, certainly, with our strategy to not take on too much interest rate risk on the loan portfolio and in the investment portfolio and with the reduction in the accretable income, those are related drivers. Okay, that is helpful. So it is fair to say that year-to-year comparison at the fourth quarter of 2014, we could likely see a NIM that is below the 340 or below the guided range. Is that correct? Yes. Okay. Great. Then, just how are you thinking about your core loan yields, actually covered portfolio? Should it be pretty stable from here going forward? It seems like they have done pretty well this quarter and still have the resi product coming out around 5%, should help support it. Is that fair? Oh, the yield will continue to drift down a little bit. I want to just clarify, this quarter, we did have a little bit of interest recovery on the non-covered portfolio. That probably added maybe 2 basis points to the margin. So that's something that's a little bit not recurring. Certainly, we hope actually that does recur in the future, but it's not necessarily something that we factor into our modeling. But over the course of 2014 and really until short-term rates go up, you will see that continue to kind of drift downward in the yield of the non-covered loans. Okay, great. Regarding the jump in the securities yields, what are you guys seeing there? Is that an extension of the duration a little bit, and should we expect to see any more upside to the yields in the near term? There has been a slight extension in the duration. Okay. Great. Then, just kind of a modeling question. When looking at the fee income line, excluding the loan sales, which I know can be a little bit lumpy, you had a bump up in other income and some other line items. Is there any way you can give some color on where you see that trending in 1Q? Yeah. I'd say I'd use a run rate of about $30 million. Okay. $30 million. Okay, and then lastly, now that you've closed the MetroCorp deal, I was just wondering if you could frame what you're thinking about the potential opportunity to grow in Texas on the loan and deposit side, and what portion of your 2014 guidance on the loan side factors in Texas growth? Well, in terms of 2014, we've been basically doing a kind of two-step approach. The first thing for us is that we wanted to make sure that we do a good job in system integration. As you know, Metro Bank has two subsidiary banks, one in Texas, the other one in California. So actually they have two systems, two separate systems. We need to do two separate system conversions. In that regard, we are scheduled to have the system conversion completed in May for one and then June for the other one. So we're going to get that out of the way. In the meantime, East West offers many more different products than what currently Metro Bank offers. So we wanted to spend some time to help train the Metro staff to learn and understand our products and follow through our policy procedures and things like that. We're not going to try to rush too much because, again, I think that we can afford to do the right thing and make sure they set up properly. Then, we got plenty of years. I mean, we have the next decade or two to have them to grow the balance sheet and so forth. But the first six months or so, we really wanted to have them to focus on system conversion. There are going to be a few consolidations of the branches that we need to work with the staff to make sure how we move the branch staff from one location to another, and learning our products. It's going to take some time. Then at any type of potential merger, there's always going to be a small degree of deposits and loans runoff. We expected probably the second half of the year with new hires that we plan to bring in to help supplement the C&I growth in Texas. Also with the existing Metro lenders and business development folks, we are going to start growing in the second half. There will be some growth there, and then also some runoff in the beginning of the year because of some consolidation and so forth. Net net, it all probably going to wash out to coming out even for the year. That is what we conservatively projected that with Metro in 2014, we are just going to keep it like a zero growth. Then going to 2015, then we have very ambitious plan for the Texas region to do a lot more. Then also to have a business model that resemble the East West business model. Okay, great. Thank you very much for the color. Thank you. Our next question comes from Mr. Herman Chan of Wells Fargo Securities. Please go ahead. Thank you. Just another follow-up on the question on Metro Bank. You mentioned 2015, you have expectations for strong growth there and transforming that franchise to mirror that of East West currently. Should we expect similar growth trajectory for Metro relative to the overall franchise at East West in 2015? I didn't get the question. Yeah. Can you repeat the question? I mean- The last sentence. Yeah, the last sentence. I missed that sentence. Sure. I just want to know, in 2015, if the Metro operation should be growing as quickly as the overall bank, outside of Texas. Oh, absolutely. Yeah. Absolutely. Yeah. That's what we expected. As a percentage- Yeah compared to their base. Because, Texas is a- strong market. It's a very strong market, and also, when it comes to the U.S.-China opportunities, obviously, if you look at the opportunities like California, New York, no doubt, it's very strong. However, you look at Texas, it may not have as much Chinese business investing in that region. The reality is that there's also not that many banks out there competing against us in this field. So we think that, for us, once we get all the merger conversion and then all the administrative things taken care of, our staff in that region can really do some great work, in terms of helping these companies in Texas connecting with potential equity investors from China or maybe exporting their goods to China and then also vice versa. Got you. In terms of the hiring process of adding new commercially focused relationship bankers, when do you expect that process to occur? Actually, we're going to start now. In fact, we have already hired a person in Dallas, then we will continue to look into opportunities. The only thing is that we are not doing it in a very intense, focused manner because, on one hand, our senior leaders in that region also have to put their priority into system conversion. But we are letting people know that we are interested to hire people who have C&I experience, people who have strong international background, people who have any particular industry expertise that is attractive to our strategic direction in the future. We're looking for all kinds of commercial banking talents that we can bring on. If we get lucky, maybe in the next few months, we all end up bringing a good group of people. That's great. But since we're not going through an intense manner, since we're putting our primary focus on system conversion, I would say that at this moment right now, I think that we're just going to continue on a part-time basis on the lookout for the next six months. Then after all the system conversion is done, then we're going to get more intense in terms of finding the right people. Understood. If I can squeeze one more in here, I want to revisit the expectations on residential loan growth in the year. As the QM rules kick in now, does the new regulation have any impact on your expectations for a slowdown in resi mortgages? There may be some. Obviously, we are following all the rules of the new non-QM. But I think that, given that we do not want to grow the portfolio a lot more, to increase the percentage of concentration of single-family residential loans, that would be one of the main driver, where we also don't think that we will grow that portfolio significantly in 2014. Understood. Thank you very much. Thanks, Herman Chan. Thank you. Our next question comes from Joe Morford of RBC Capital Markets. Please go ahead. Thanks. Good morning, everyone. Good morning, Joe. Just wanted to circle back on the strong commercial loan growth in the quarter, and just wondered if you could talk a bit more about the drivers there. How much generally came from, say, the international trade finance side versus some of the niche portfolios that you've been pursuing? Yes, you're right. You covered them all. Mainly, I would say that international trade finance is the primary driver. Then from some of the other industry niches, like for example, in our entertainment, that we actually also have some nice gain. Then from the technology life science area, we have a few good loans that we booked. I would say that, pretty much across the board, some manufacturing, small middle-market business. But clearly, I would say that primary international trade finance, and then with a good mix, very diverse coverage of these strategic industries that East West made a commitment to invest a few years ago, and we are getting results from all categories. That actually is the reason why we feel relatively confident that in 2014, we should have the ability to carry the momentum to continue to grow our C&I portfolio, because a few years ago, we made a very strong commitment to invest in these various industries, with the expertise that are relevant to our mission of being that bridge between the East and the West and being that bridge for U.S. and China business. I think that to a certain degree, slowly, gradually, it is paying off. We hope that that momentum will continue and allow us to continue to even not only be able to bring additional new hires. The fact is, now we have more and more of our homegrown professionals that we brought in on the entry level, but a few years of more intense on-the-job training, they also can step up on their own to also help increase the organic growth. With all of that, I think that we're expecting this direction will help us to grow our loan portfolio for the next 10 years. Also, the last few years, while traditionally most of our trade finance customers are importers, we have been very successful in growing our exporters customers, and many of them are very sizable companies. So we are very pleased with the progress in increasing our exporters customers in addition to the importers. Okay. Thanks for that. I guess along those lines too, can you just update us on the China portfolio? What's the current size of that and any growth you may have seen this quarter? China portfolio remains small. I think that it's by design. As we stated before, we do not want to aggressively get into the domestic market. We do not think that while China is growing nicely in terms of GDP, despite the fact it's slowing down, it still stay at a 7.7% and is substantially higher than most nations around the world. But the reality is that the domestic market can be somewhat volatile. Also, our capital level is not at the size that we should sort of get into China in a much deeper way from a domestic market point of view. So day one, when we took over the United Commercial Bank, through this FDIC acquisition, we have made a decision that our East West Bank's involvement with the U.S.-China business were predominantly in this cross-border lending. On top of that, we will be advising companies from China in terms of investing in U.S. We will be helping U.S. companies in terms of open their operations in China and so forth. We are going to continue to stay in that circle. There is plenty of opportunity for us. Now, because of our strategic decision, many of the loans that we booked that involve Chinese company and many of the business that we advise from U.S. that are investing in China and so forth, or have relationship in China, or have a strong operation in China, are U.S. companies. We ended up booking most of these loans and deposit in the United States. So we see that trend continue, and we will continue to offer value proposition to our clients in U.S. that have substantial business operation in China. But we end up doing banking relationship of taking their deposit or making loans to them in U.S. dollar in U.S. with the U.S. collateral and so forth. We have also many business in China that when they invest in U.S. and we make a loan to them in U.S., then they pledge their deposits in China for us. So through that, we will still be making some loans in China, and most of them probably may be U.S. companies or maybe Chinese company, have very strong, secure collateral, such as cash or maybe other forms of security that we feel very comfortable with. So by doing that, we really are not taking much of the exposure for credit point of view in China. I expect that in 2014 and beyond, we will continue to grow the Chinese portfolio slowly. However, it will be very meaningful in terms of any additional growth that we make there, it will end up helping us to grow maybe two or three times more in U.S. That is the strategy. Similar direction that we are doing in Hong Kong. So the Hong Kong portfolio also is growing. So if you look at in 2013, both the portfolio in China and the portfolio in Hong Kong have grown, but not grown in the magnitude that will be what I call becomes a material number for the overall financial earnings perspective. However, it is extremely material from a strategic point of view, helping us to gain and win business in the U.S. Okay, that's very helpful. Thanks, Dominic. Thank you. Our next question is from Jennifer Demba of SunTrust Robinson Humphrey. Please go ahead. Good afternoon. Just a follow-up question on the Las Vegas branch. I think, Dominic, you said you already have some commercial relationships in that market. I was wondering if you could quantify that and frame what you think the opportunity is there for loan growth over the next few years. Yes. In fact, throughout the years, I would say that for the last 15 years or so, we have clients, long-term East West Bank clients, who also have expanded the business into the Nevada region. In fact, many of them are commercial real estate investors or commercial real estate developers and so forth. So in addition to investing in real estate in California, they also looked at states like maybe Arizona and Nevada. In fact, from our perspective, there are more people interested in Nevada instead of Arizona. As they continue to move beyond the California region, East West Bank follows them. We have made loans in Nevada, and also in the past, with our longtime existing customers. Then some of these customers now also get into commercial business, the C&I type of business that really fit into our future growth direction. So it's sort of like following the existing customers, and through them, they also introduce their friends in Las Vegas, and so helping us grow. So we actually, for many years now, have clients in Las Vegas. We just didn't have a branch there to take on their deposits. We've been thinking about opening a branch in Vegas actually for the last 2 or 3 years. We just have been so busy doing something else, and we haven't really got around to it. And finally, I think that we decided it's about time. Now, the other thing that I also wanted to mention is that when we did a lot of, let's say, commercial real estate loans with these East West clients who happen to have business in Vegas, frankly, most of the deposits are housed with us in California anyway. It wasn't that compelling of a reason for us to open a standalone branch in the state of Nevada back in, I would say, the old days. It becomes more compelling today for a few different reasons. One, we are getting bigger now, and we have branches in the state of Washington and Massachusetts, New York, and Georgia, and then Texas. We are much more comfortable to operate out of state. So it's not as inefficient compared with the old days when we were based mainly in California and said, "Why do we want to go to Nevada and then create more cost and then have to manage by flying out there and things like that?" But now it becomes just another natural fit, simply because we're already out of state so much and doing so much business there. We are very comfortable to manage risk that are out of state. That's one. Secondly, there's substantial more interest of business of investors from China who are visiting Las Vegas. Back then, everybody had to fly into Los Angeles before they can go and visit the gaming area in Las Vegas. Now, there are a lot of people flying direct to Las Vegas. So we have more and more of our Chinese customers who frequently visit Las Vegas anyway. So there's another opportunity we feel that having a branch there will help us to make it much more convenient for our customers also from China. So that's the second reason. And so third, we really feel that with our ability to grow C&I, that we will have the ability also to make inroads even in the gaming industry. And we have clients that continue to move from Los Angeles to the state of Nevada. And particularly, with the state tax in California now moved up to 13.5%, and there are quite a few of our customers that some are still talking, some already made a move to make their permanent residence in Las Vegas instead of Los Angeles. And we're seeing more and more of our customers moving that direction. Because for those who have business that doesn't have to specifically reside in California, many of them have made the decision that they'll be better off to save 13.5% tax to go to the state of Nevada and to establish residency instead of being a California resident. So when we see that trend going on, we need to step in and accommodate that. That's sort of like the last but not least reason that we think that we need to have presence in Nevada. Thank you. That's helpful. Our next question comes from Lana Chan of BMO Capital Markets. Please go ahead. Hi, good afternoon. On the MetroCorp deal, I think you said before, the estimate is expected to be $0.02 accretive to earnings this year, which, correct me if I'm wrong, I think that's a little bit less than what you originally estimated when you announced the deal. Is that right? And what changed? No, the $0.02 is after that $0.05 one-time charge-off. The growth is $0.07. Okay. Yeah. Then if I look at the non-interest expenses which came in higher than expected this quarter, couple of reasons for that, obviously, but with the guidance for 2014, could you sort of help us frame what the sort of trajectory would be? I mean, what's a good base to use for the first quarter? Because it seems like there's a couple of puts and takes there on the expense side. You're talking about the NII for the Q1? Non-interest expense. Oh, the expense. Yeah. About $100 million. Yeah. It will be a little more than that, right? Because of the Metro. Lana, the specifics of it, if you like, I can go over with you maybe after the call, but I would say with the different line items where there was an increase from the prior quarter, certainly, the amortization of affordable housing tax credit, that is something that should go back to a more normalized run rate. We have some more tax credit investments that we purchased, so maybe a little bit higher than what we had in the third quarter, but certainly nowhere near the $14 million or so in the fourth quarter. Additionally, from a comp line item, I think there were really two areas. One, we have hired additional staff, so payroll is higher, and then also we made a little bit of a refinement to our bonus accrual. If you look at the increase in comp, it was about 50/50 for those two categories. On the legal side, I would say legal expense was elevated during the quarter. There were some settlements and resolution of litigation. Additionally, also ongoing costs for the litigation as well. If you look at the kind of run rate in the fourth quarter, I would say about $7 million or so relates to litigation that will no longer occur. So that is something that you can use for your modeling. Okay. Thanks, Irene. Our next question comes from John Piscitelli of Evercore. Please go ahead. Good morning. Good morning. Just back to that answer you just gave on the compensation. The payroll piece, the 50% of it that is attributable to the higher payroll, then that should remain in the run rate, but the incentive comp true up, the other half of the increase should come out next quarter, correct? That seems reasonable. Okay. All right. Then just on the outlook for the reserve, can you just update us on what your thoughts are for a good assumption for the long-term loan loss reserve level given your growth expectations? I believe you might have implied in the past that 150 basis points will be a good trajectory, but just wanted to see if that is still where your thinking is. I think so, but roughly about 1.5%. It will change based upon the mix of the loans. But I would say for long term right now, we think 1.5 is a good number. Okay. All right. Lastly, actually back to the expense base. The increase of the other expenses, was that at all related to the tax credits, or was that all purely in the amortization line? Could you repeat that one more time? The tax credits? What was the driver of the increase in the other expenses? Oh, the other expenses increased a little bit in the fourth quarter. We had increased our charitable contributions. So that's- Oh, okay. All right. So that's also an area that could see a decline going into 1Q. That could be. Okay. All right. That's it for me. Thanks. Our next question comes from Aaron Deer of Sandler O'Neill & Partners. Please go ahead. Aaron? I'm sorry. I'm on multiple calls here. We got you. If you've answered this question already, forgive me. The commercial real estate non-accruals ticked up again this quarter. I was wondering if you could talk about what's kind of behind that trend, if there's a specific borrower or property type. Yeah. We had a couple of loans where the loans have gone more than 90 days past due. When we look at them, given our historic kind of low LTV, we don't think necessarily there'll be any credit loss content from that, and there were no charge-offs, but certainly from time to time, that does happen. It's the borrowers having their own problems, but we feel that the value is there, that it will not result in any charge-off or losses. Okay. All right. That I think is really it. Good luck with the integration. Thank you. Thank you, Aaron. Our next question comes from Matthew Clark of Piper Sandler. Hey, good morning, guys. I just wanted to clarify the core fee question. I am not sure if your answer was for other income on an annual basis, or if it was for the core fees X the change in indemnification asset. I think you had mentioned $30 million. Can you just clarify that? It is the core fee per quarter. Yeah. It is $30 million. When you model- You know, conceptually, we break out the fee income. So, in the fourth quarter, that was $33.4 million. That is what we are comparing that against, the $30 million. Okay. Does that $30 million incorporate MCBI? It does not. Okay. Actually. Okay. On the expenses- I would say MCBI, their fee income is pretty low, so I don't think that's going to be a big difference one way or another, quite candidly. Yep. On expenses, the guidance of $430 million to $440 million includes the $7 million of merger charges, but also I assume it would include Metro too. Just want to make sure. Yes. Okay. That's all. Got it. Thank you. Thank you. Again, if you have a question, please press star then one. At this time, I see no other questions in the queue. Therefore, this concludes our question and answer session. I would like to turn the conference back over to Mr. Dominic Ng for any closing remarks. Mr. Ng? Well, thank you all for joining us to call today, and I look forward to speaking with you again in April. Bye-bye. The conference is now concluded. Thank you.