East West Bancorp Inc

NASDAQ:EWBC

Earnings Call Transcript 2021-Q2

[Operator]

Good day, and welcome to the East West Bancorp Second Quarter 2021 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] We ask that you please limit yourself to two questions. Please note this event is being recorded.

I would now like to turn the conference over to Ms. Julianna Balicka, Director of Investor Relations. Please go ahead ma'am.

[Julianna Balicka, Director, Investor Relations]

Thank you, Chuck. Good morning, and thank you everyone for joining us to review the financial results of East West Bancorp for the second quarter of 2021. With me on this conference call today are, Dominic Ng our Chairman and Chief Executive Officer; and Irene Oh, our Chief Financial Officer.

I'd like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For a more detailed descriptions of the risk factors that could 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, 2020.

In addition some of the numbers referenced on this call pertain to adjusted numbers. Please refer to our first quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures. During the course of this call, we will be referencing a slide deck that is available as part of the webcast on the Investor Relations site. As a reminder, today's call is being recorded and will also be available in replay format on our Investor Relations website.

I will now turn the call over to Dominic.

[Dominic Ng, Chairman & Chief Executive Officer]

Thank you, Julianna. Good morning. And thank you everyone for joining us for our earnings call. I will begin the review of our financial results with slide 3 of our presentation. This morning, we reported second quarter 2021 net income of $225 million or $1.57 per share. This was an increase of 10% from $205 million in the first quarter. Highlights of our strong performance include robust loan and deposit growth expanding profitability and improving asset quality.

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In the second quarter, we earned a $283 million in pre-tax pre-provision income on total revenue of $445 million. Our pre-tax pre-provision income grew by 8% linked quarter or 33% annualized and we expect it to continue to grow in the second half of the year.

Quarter-over-quarter our pre-tax pre-provision profitability expanded by 6 basis points to 2% of average assets, reflecting East West attractive core earnings power. Asset quality has remained healthy with improvements in every metric.

Because of this and a more constructive macroeconomic forecast, we recorded a negative $15 million provision for credit losses in the second quarter compared with a zero provision in the first quarter. In sum, we returned an attractive 1.56% on average assets, 16.6% on average equity and 18.3% on average tangible equity for the second quarter of 2021.

Slide 4 presents a summary of our balance sheet. As of June 30, 2021, total loans reached a record of $40.1 billion including $1.4 billion of Paycheck Protection Program loans. Excluding PPP, Total loans grew by 12% annualized from March 31, 2021.

Second quarter production was distributed across residential mortgage, C&I and commercial real estate. Year-to-date for the first half of 2021, loans excluding PPP grew 10% annualized. Based on the current pipeline and expectations, we increased our full year outlook for loan growth to a range of 9% to 10%, up from 8% previously.

As you can see on this slide, our portfolio is somewhat equally weighted between the three major loan types. This differentiates East West from many other regional banks. We also benefit from a geographic footprint with locations in dynamic metropolitan areas. We believe that this diversification is a strength that provides multiple engines of growth and reduces credit concentration risk.

We are positive about the trajectory of loan growth across our business lines. Our retail branch network is an excellent source of new consumer and commercial banking relationships. We continue to see high origination volumes for single-family mortgages and home equity lines of credit, which we primarily originate through our branches. Furthermore, through our retail branches we are also growing small business C&I loans and smaller-sized multi-family and commercial real estate mortgages.

Our commercial lending teams, including our specialty lending verticals serve our middle market and corporate C&I and CRE customers. The teams are expanding existing customer relationships and gaining new market share, driving solid balance sheet growth.

In the second quarter, deposit growth continued to be very strong. As of June 30, 2021, total deposits reached a record of $52.6 billion, up $3 billion, or 25% annualized from March 31. Non-interest-bearing deposits grew $2.9 billion, or 61% annualized to a record $21.8 billion as of quarter end making up 41% of total deposits, up from 38% a quarter ago, and up from 34% a year ago.

Similar to loans, our deposit growth was also well diversified across our consumer, small business, borders and cross-border customer segments, reflecting our ability to win new accounts and expand wallet share of existing ones. Over the last several years, we invested in cash management products and risk management solutions that allow us to better serve larger more complex businesses.

We also invested in consumer and commercial digital banking platforms with cross-border capabilities. We are pleased with the deposit generation and the related increase in deposit account fees, which were up 60% year-over-year to $17.3 million.

Turning to slide 5. You can see our strong capital ratios as of June 30, 2021 with a common equity Tier 1 ratio of 12.8% and a total capital ratio of 14.3%, which provides us with meaningful capacity for future growth. East West Board of Directors has declared third quarter 2021 dividends for the company's common stock. The common stock cash dividend of $0.33 is payable on August 16, 2021 to stockholders of record on August 2, 2021.

Moving on to a discussion of our loan portfolio beginning with slide 6. C&I loans outstanding, excluding PPP were $12.4 billion as of June 30, 2021, an increase of 12% annualized from March 31. Total C&I commitments were $17.7 billion as of June 30, a sequential increase of 10% annualized.

On an average basis, C&I loans excluding PPP grew by 6% annualized in the second quarter. Growth was well diversified by industry and reflected great performance across our footprint and teams. I would highlight general C&I production in California as well as contribution from our China and New York-based teams. By industry, I would highlight an attainment clean energy and general manufacturing and wholesale.

Slide 7 and 8 showed the essential details of our commercial real estate portfolio. Total commercial real estate loans were $15.4 billion as of June 30, 2021 up, by 8% annualized, from March 31. From the past several quarters our origination volume especially from smaller sized CRE clients have been consistent.

We also benefit from our geographic footprint outside of California. In the second quarter Texas, bolstered overall CRE growth. In slide 9 and 10 we provide details, regarding our residential mortgage portfolios.

During the second quarter, we originated $1.2 billion of residential mortgage loans, an increase of 5% sequentially. This was a record quarter of residential mortgage origination for East West.

And although, we expect this to slow as the market changes good momentum is continuing into the second half of the year. Residential mortgage loans were $10.7 billion as of June 30, 2021, growing by 18% analyzed from March 31st.

I will now turn the call over to Irene for a more detailed discussion of our asset quality and income statement. Irene?

[Irene Oh, Chief Financial Officer]

Thank you, Dominic. I'll start with asset quality metrics on slide 11. Overall, we're very pleased that all of our key asset quality metrics improved quarter-over-quarter. Total criticized loans were down by 15% to $1 billion as of June 30th, 2021 or 2.6% of total loans.

We saw improvement across all significant loan portfolios. Nonperforming assets were down by 13% to $226 million or 38 basis points of total assets as of June 30th. The broad-based improvement in asset quality included our oil and gas portfolio, a better operating environment for the sector drove several upgrades.

This along with workouts, payoffs and pay downs reduced oil and gas criticized loans to 26%, and non-accrual loans to 7% of the portfolio. Accordingly, we released $34 million of loan loss reserves. Allowance coverage of oil and gas loans was 9.8% as of June 30th, compared with 11.6% as of March 31st.

On slide 12 we present the components of our allowance for loan losses. Our allowance totaled $586 million as of June 30th or 1.52% of loans excluding PPP compared with $608 million or 1.62%, as of March 31st and compared with 1.39%, on day one post-CECL.

Net charge-offs decreased to $13.3 million in the second quarter from $13.4 million in the first quarter. The second quarter net charge-off ratio was 13 basis points of average loans annualized an improvement of one basis point from 14 basis points annualized in the first quarter.

During the second quarter we recorded a negative $15 million provision for credit losses compared with zero provision in the first quarter. Currently we do not expect to record a provision for credit losses in the second half of the year.

And now, moving on to a discussion of our income statement on slide 13, this slide summarizes the key line items of the income statement, which I'll discuss in more detail on the following slides.

I'd like to flag a couple of non-cash items and non-interest income. Other investment income increased by $7 million sequentially reflecting higher valuations of CRA SBIC investments during the quarter.

Included in interest rate contracts and other derivatives are mark-to-market adjustments which were a $5 million loss in the second quarter, compared with a $14 million gain in the first quarter. These primarily relate to changes in the credit valuation adjustment.

The second quarter income tax expense was $46 million and effective tax rate was 17%. The year-to-date effective tax rate for the first half of 2021 was 15%. And we expect that the full year effective tax rate will also be 15%.

I'll now review the key drivers of our net interest income and net interest margin on slides 14 through 17, starting with the average balance sheet. Second quarter average loans of $39.6 billion grew by $900 million or 9% linked quarter annualized and by 10% linked quarter -- excuse me, 10% annualized excluding PPP.

As Dominic discussed, growth was broad-based across our major loan portfolios and strongest from residential mortgage. Second quarter average deposits of $50.2 billion were up by $2.3 billion or 20% linked quarter annualized.

Aside from time deposits, all other deposit categories increased led by non-interest-bearing demand deposits at a rate of 36% annualized. As a result, our average loan-to-deposit ratio was 79% in the second quarter, down from 81% in the first quarter. Our average earning asset growth in the second quarter reflected the strong deposit growth year-to-date. On an average basis, securities available for sale increased by $1.5 billion and repo assets increased by $700 million. This was partially offset by a $1 billion decline in average interest-bearing cash and cash equivalents as we deploy some of our excess liquidity. Overall the mix of average earning assets was higher yielding in the second quarter. During the second quarter $400 million of FHLB funding, which carried an effective interest rate of 2.25% matured and was paid off.

Turning to slide 15. Second quarter 2021 net interest income of $376 million was the highest quarterly net interest income in the history of East West growing by 26% linked quarter annualized. Quarter-over-quarter, the net interest margin expanded to 2.75% in the second quarter, an increase of four basis points from the prior quarter. Income related to PPP loans was $15 million in the second quarter and included $11 million of deferred loan fees similar to the amount in the first quarter. As of June 30, 2021, we had $26 million of PPP deferred loan fees remaining to accrete into income.

As you can see in the waterfall chart on this slide, the four basis point quarter-over-quarter increase in the net interest margin breaks down as follows; plus three basis points each from a lower cost of interest-bearing deposits and from the deployment of excess liquidity partially offset by minus one basis point each from lower other earning asset yields and lower loan yields. The lower cost of deposits more than offset the drag to net interest margin from lower yields and the deployment of excess liquidity expanded the net interest margin in the quarter.

In our updated outlook, we expect the full year net interest income excluding PPP will grow by 10% to 11% year-over-year, which is just ahead of our anticipated loan growth of 9% to 10%. This reflects the impact of securities available for sale and repo asset purchases in addition to net interest income expansion driven by loan growth.

Turning to slide 16. The second quarter average loan yield was 3.57% and excluding the impact of PPP, the adjusted loan yield was 3.58%, down slightly by two basis points from 3.60% in the first quarter.

Turning to slide 17. Our average cost of deposits for the second quarter dropped to 14 basis points, an improvement of four basis points from the first quarter. The spot rate of total deposits as of June 30th was 13 basis points, down by three basis points from March 31st. Our cost of deposits declined as maturing higher-rate CDs repriced to current market rates and we decreased rates paid on money market and interest-bearing checking accounts. We expect to further reduce our cost of deposits as the maturing CDs from price over the second half of 2021, although the impact of this will diminish after that. The average cost of CDs in the second quarter was 40 basis points, a drop of 10 basis points from the first quarter. In the second quarter we originated or renewed $4.5 billion of domestic CDs at a blended rate of 19 basis points and a weighted average duration of four months. We have $927 million of CDs maturing in the third quarter at a blended rate of 55 basis points and another $1 billion in the fourth quarter at a blended rate of 35 basis points.

Moving on to fee income on slide 18. Total noninterest income in the second quarter was $68 million and this reflects the noncash items noted on slide 13. Second quarter fee income and net gains on sales of loans were $63 million, up by $8 million or 15% from the first quarter. Higher transaction volume and new customer acquisition growth healthy increases in customer driven foreign exchange income, lending fees, wealth management, and deposit account fees. Fee income growth momentum is continuing into the third quarter and we expect these business lines to show strength for the full year. Quarter-over-quarter, interest rate contracts revenue declined reflecting lower customer transaction volume and demand in the current interest rate environment.

Moving on to slide 19. Second quarter noninterest expense was $189.5 million, excluding amortization of tax credits and other investments and core deposit intangible amortization. Adjusted noninterest expense was $161.5 million in the second quarter, a decrease of $3 million or 2% sequentially. This reflects careful expense management and a quarter-over-quarter decrease in compensation and employee benefits from a seasonally high first quarter. Year-over-year adjusted non-interest expense increased by 5%.

The second quarter adjusted efficiency ratio was 36.3%, compared with 38.7% in the first quarter. Importantly, we achieved our efficiency ratio, not just through expense management, but through increased revenue. Reinforcing our revenue growth is our continuous investments in people and technology to expand our banking capabilities and product offerings.

And with that, I'll now review our updated full year outlook for 2021 on slide 20. We've updated our full year outlook for 2021 relative to a quarter ago. For the full year of 2021, compared with our full year 2020 results, we expect year-over-year loan growth, excluding PPP in the range of 9% to 10%, up from our prior outlook of approximately 8%.

Year-over-year adjusted net interest income growth excluding PPP in the range of 10% to 11%. We've adjusted our outlook to incorporate the impact of year-to-date securities and repo purchases, which we expect will lift net interest income growth ahead of loan growth.

Adjusted non-interest expense growth, excluding tax credit investment amortization of 5% year-over-year unchanged from our prior outlook. Based on our macroeconomic forecast and loan growth outlook, at this point, we do not expect to book a provision for credit losses in the second half of the year. Full year 2021 effective tax rate of approximately 15%, including the impact of tax credit investments unchanged from our prior outlook.

With that, I'll now turn the call back over to Dominic for closing remarks.

[Dominic Ng, Chairman & Chief Executive Officer]

Thank you, Irene. In closing, we had a very strong second quarter and expect that to continue for the rest of the year. While the hard work and excellent execution by all of our associates drive our results and is a true testament of the culture of East West.

I will now open up the call to questions. Operator?

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And the first question will come from Ebrahim Poonawala with Bank of America. Please go ahead.

[Ebrahim Poonawala, Bank of America]

Good morning.

[Dominic Ng, Chairman & Chief Executive Officer]

Good morning.

[Ebrahim Poonawala, Bank of America]

I guess just first question maybe for Irene for you around cash management. You've been buying into the AFS portfolio, as well as the repos. Just give us a sense of how you're thinking about holding on to excess liquidity? What's the duration of the assets that you're adding and just overall asset sensitivity of the bank as we think about eventually short rates going higher?

[Irene Oh, Chief Financial Officer]

Yes. Great question, Ebrahim. Certainly, I think our view from what we -- the actions that we took in the first quarter have shifted a little bit with the long-term rates coming down. So, although we do expect to redeploy some of our excess cash. We're a little bit shy as far as going out too long. And I think we'll be a little bit more cautious than the actions that you saw we took in the first quarter, when the tenure was higher and we redeployed about $2 billion into longer-duration securities and repos. The repo, the variable rate I think that's more attractive for us in the current environment and the securities that we're buying right now probably about largely MBS, CMOs about 1.5 kind of rate.

[Ebrahim Poonawala, Bank of America]

Got it. And I guess a separate question, Dominic for you. I mean, loan growth seems to be very strong. Deposit growth is very strong. Give us a sense now that you had like six to nine months under the Biden administration. The headlines around US-China still suggest a lot of tension. How is that impacting your growth outlook? How you're going about growing the bank? Because that's something that consistently keeps coming up from an investor standpoint when they think about East West.

[Dominic Ng, Chairman & Chief Executive Officer]

Good question. Well, first of all, I think in the second quarter, we are growing nicely in China and our cross-border business. And I think that that has a lot to do with, while the political rhetoric out there, it's always going to be there because that seems to be something that gain a lot of traction among politicians and so forth. But if you look at the business, there is still, obviously a lot of business going on between US and China. And now, the headline news about some of the large investment may not be coming but you have to understand from East West Bank perspective, we are mainly focusing on the midsized business and they're not the high-profile business and then they are not the highly sensitive kind of business like artificial intelligence or very much high-tech stuff.

So from our perspective, we have plenty of our clients continue to do cross-border business and they are doing fine. And now, we also have to reflect back on for the last four years. Under the Trump administration, there are a lot of – not only just reverts [ph] but also the enforcement of tariffs.

Our clients navigated through, it wasn't easy and East West Bank navigated through. And in fact, every single year we had growth for the last four years. And in terms of overall risk management, we're doing great. Reason being is that this is our strength. We have the expertise in the cross-border US-China space. And this is something that we're really good at.

If I look at just the last two quarters, we have very diversified growth in our China operation and we have very diversified growth in US from our cross-border business and spread from clean energy, general manufacturing, wholesale, consumer goods to private equity, et cetera. So we have a pretty broad base of growth opportunity.

I think one of the things I really want to highlight is that the reason of the growth is not that unlike the multinational companies or the money center banks, who actually for the last six months or so has been stepping up and investing in China. You heard the news about JPMorgan, Morgan Stanley, Goldman Sachs, they're all stepping up and investing more in China.

The Standard Chartered and HSBC, they are talking about hiring thousands of people in Hong Kong. We're not doing any of that. We've been very, very consistent to focusing on our strategy of being the bridge between the East and West and certain cross-border business.

And what we have done is over the last few years, we talked about it in the quarterly earnings release often. That is that we continue to make investment in technology, in cash management product capability, FX capability, et cetera. The whole idea is that we build a platform, we build product capability that fit the customer needs getting the cross-border business, whether there are US companies exporting to China, importing from China or maybe having investment in China or vice versa, we're providing the product capabilities to support them.

Four, five years ago, it was half aspiration, half capability. Today, we have a lot more capability from a technical standpoint. So when you see the growth of fee income and treasury management. When you see the fee income of foreign exchange that we have this record fee income in this quarter and the deposit – nice deposit growth DDA and so forth and it would together with loans is no surprise because we have built up the capability that allow us to expand not only with new customer relationships but also getting a larger wallet share from many of our existing customers, who maybe four years ago weren't able to do certain type of like foreign exchange or maybe certain type of cash management relationship with us because the little bit lack of capability in the past that we were able to correct that.

So our digital offering and our online offering are much stronger and we'll continue to build that. And in the next few years we'll continue to focus on building that capability because the market opportunities is enormous for East West Bank that have the strong expertise to continue to expand in this direction.

[Operator]

The next question will come from Ken Zerbe with Morgan Stanley. Please go ahead.

[Ken Zerbe, Morgan Stanley]

Thank you. Good morning. I guess, when you think about loan growth on a go-forward basis obviously resi mortgage has just been such an amazing driver of that growth. But when we think -- when you look out to the second half of the year maybe into 2022 is -- does resi continue to be the main driver, or do you think that C&I could actually start picking up a fair bit from here?

[Dominic Ng, Chairman & Chief Executive Officer]

I've been predicting the demise of single-family mortgages for the last four, five years and I was wrong every single year. So somehow every two quarters I start talking internally with our team and saying that I'm not sure that the single-family mortgages origination can sustain at this level.

And so my mortgage department continue to pleasantly surprise me because I thought fourth quarter last year was at all-time high. There's no way that we can ever beat that. And the first quarter just beat that. And then I thought it will be over and then second quarter come in and then become record performance again.

Now at some point being prudent I always expect that at some point it will subside. But then I would say that looking at the pipeline today and looking at the origination still seems to be going when would we slow down? I don't know yet. But in the meantime, we are very confident with our C&I growth and our CRE growth, I mean our approach has always been we're going to try to do it in a very balanced approach. This whole pie chart that we share that we have a somewhat equally distributed type of balance sheet in terms of somewhat equal rate of C&I, CRE and single family. And so if one particular area is slowing a little bit hopefully the other two will pick up.

And so far that's been working just like that. And I would expect that maybe when the economies start picking up even more and East West continue to -- so far we've been able to for the last 12 months, 24 months we've been continuing getting new C&I customers. And it just as a matter of math because we got so many new C&I customers at some point the balance will grow. And so I expect that that C&I will continue to grow. And hopefully at the time that single-family is not slowing down a little bit the C&I will step up a little bit more. So that's what we see at this point. But so far things look pretty good.

[Ken Zerbe, Morgan Stanley]

Okay. Great. And then my second question really quick maybe one for Irene. I guess when you guys originally said you do not expect a provision expense this year. I originally thought you meant zero, but obviously it came in below that. Is it fair to assume that is it fair to expect a negative provision expense in the back half of the year?

[Irene Oh, Chief Financial Officer]

Ken, my original expectation was that it would be zero along with your expectation and interpretation of our guidance. I think at this point given our portfolio, given the trajectory we're comfortable, let's say, at zero provision for the second half of the year depending on the economic outlook largely for the different models that we run driven by the unemployment rate the 210 treasury spreads GDP growth. I think it's within the realm of possibility it could go negative. But certainly I think from our perspective we want to be cautious with the provision and the negative provision. So I'm comfortable with the zero provision for the second half of the year.

[Operator]

The next question will come from Jared Shaw with Wells Fargo Securities. Please go ahead.

[Jared Shaw, Wells Fargo Securities]

Hi. Good morning.

[Dominic Ng, Chairman & Chief Executive Officer]

Good morning.

[Jared Shaw, Wells Fargo Securities]

I guess my first question more on liquidity. And when you look at the commercial customers that are stepping back up in borrowing today are they doing so while still keeping high levels of liquidity on their own balance sheet -- and how should we think about future loan growth? Will that potentially be offset by potential deposit outflows with the loan-to-deposit ratio normalizing?

[Irene Oh, Chief Financial Officer]

Jared, a lot of the new growth that we've had and the balance increases that you're seeing on the C&I side in particular is really new customer acquisition. I think if you look at it and if we look just in general for our C&I customers, overall utilization rates are pretty flattish. And overall, when we look at the financials of our C&I customers, we agree, right? People have a lot of cash. They have a lot of liquidity. That's one of the reasons the utilization rates aren't increasing. But the balance increases are really from new customer acquisitions. Hope that helps clarify your question.

[Jared Shaw, Wells Fargo Securities]

Yeah. Yeah. But I guess -- okay yes that's good. And then on the fee income side great growth on fee income and good guidance there. Is that -- are you seeing a sort of pent-up demand coming out now that things are starting to release, or is this just more of a good return to normal and we should see a steady march higher from here as volume and capacity continues to increase?

[Dominic Ng, Chairman & Chief Executive Officer]

Well, I'm pretty sure that some of them is just a bit of a rebound from 2020 in terms of when there are more vaccination and then the economy opening up a little bit, there's to a certain degree to that. But I think again going back on the East West Bank perspective, we have brought in a lot more new customers. And also as I shared earlier from the cross-border banking perspective, we have -- actually not just cross-border banking actually. Many of our more sophisticated larger-sized clients are signing up with our cash management services that maybe two, three years ago, a certain type of deposit will still reside in some of the money center bank and many of them were willing to move more and more of their deposit to us and giving us the larger wallet share. And that drives these additional fee income in the treasury management services. And then of course on the foreign exchange, because if there's so much more cross-border both from a consumer and commercial side.

In addition to that in terms of wealth management, again, that's just sheer bringing in more customers, because that really isn't related to more sophisticated platform and so forth. It's just bringing more customers. And so we expect that we'll continue to execute in this strategic direction. And our focus is continue to be a diversified portfolio of client base to allow us to not have to over-rely on any concentrated growth risk and that's the game plan.

[Operator]

The next question will come from Brock Vandervliet with UBS. Please go ahead.

[Vilas Abraham, UBS]

Hi, guys. This is Vilas Abraham in for Brock. Just maybe starting off on C&I growth again. So obviously very good. It sounds like customer acquisition is the driver which is great. And your pricing was also pretty stable quarter-over-quarter. Have you had to make any trade-offs on pricing or structure to keep some of this momentum going that you've seen?

[Dominic Ng, Chairman & Chief Executive Officer]

We have again going back to a very diversified group from industry perspective, from a geographic perspective, there are always some type of business that like all the community banks or maybe regional banks are all heavily engaged in and versus those businesses there are some competitive pressure. There are others like some of our cross-border business that we hardly have any competition that we do not have as much pressure. So -- but all in all, I think having a diversified portfolio of C&I loans and with many different sectors allow us to somewhat blend it into where we are today. So I look at it is that there's always going to be pressures here and there but then we have very unique value propositions in some of the sectors that allow us to get the kind of like pricing that make it work out. So that's why you see that very stable type of yield.

[Vilas Abraham, UBS]

Okay. And just my second question. Can you talk a little bit more about East West business in Texas that you alluded to in your remarks. How should we think about the strength of that economy and the migration into that state as it relates to your guys' portfolio? Thank you.

[Dominic Ng, Chairman & Chief Executive Officer]

Our Texas team is doing well, doing very well. In fact obviously, we will take that oil and gas aside because that's where we are trying to make sure that we hold it below $1 billion and that's so far going really well. Obviously, the -- all the asset quality metrics improved much better. But we put that on the side the C&I and CRE in Texas are growing. It's a great market. We have very strong talent in that region and we expect continued strong growth in Texas.

[Operator]

The next question will come from Matthew Clark with Piper Sandler. Please go ahead.

[Matthew Clark, Piper Sandler]

Hey, good morning.

[Dominic Ng, Chairman & Chief Executive Officer]

Good morning.

[Matthew Clark, Piper Sandler]

First question just around loan pricing and given what the curve has done of late, have you seen any change in terms of the competition on new business here more recently?

[Dominic Ng, Chairman & Chief Executive Officer]

There are always competition in particular in CRE that sort of like keep going down in terms of pricing. And so frankly we could have done a lot more if we were willing to just going down the same path. But I think our position is that by and large our focus on CRE is to work with our long-time existing customers and also continue to develop new relationships. But to a certain degree, we have value-added services that allow us to hold the pricing maybe slightly better than the downward spiral that are taking all about that's going on among some of these other smaller community banks. And that's something that we just don't think that is necessary for us to go down that path. And I think that because many of those other banks like based on their yield curve and then walk the price down. And then I think eventually, when the interest rate environment change, it can hurt them in the long run. So we are looking at both short-term and long-term. So -- and just do things prudently in the East West way.

[Matthew Clark, Piper Sandler]

Okay. And then in multifamily you had a nice step up after remaining fairly stable over the last 12 months. Have you changed your appetite there? And where is that growth coming from within your markets?

[Irene Oh, Chief Financial Officer]

Yes. That growth is really coming largely from Southern California and then also to Dominic's points earlier, also our Texas team as well, with no change in our strategy or direction.

[Operator]

The next question will come from Dave Rochester with Compass Point. Please go ahead.

[Dave Rochester, Compass Point]

Hey, good morning, guys.

[Matthew Clark, Piper Sandler]

Good morning.

[Dave Rochester, Compass Point]

My first question would be on the deposit growth. That has been fantastic here. I remember in the first quarter you said that was going to slow in 2Q. And I guess, technically it did but it's still 6% so congrats there. I was just wondering how you see that momentum continuing into the back half of the year, if you're expecting that to continue to slow but still remain strong? And then if I heard you correctly, it sounds like you're assuming slower securities growth in your NII guide. So I just wanted to confirm that. And then also if you could talk about what kind of curve you're factoring into the NII guide as well that would be great.

[Irene Oh, Chief Financial Officer]

Yes. Great questions Dave. Our deposit growth there's no question with kind of the investments that we've made the product offering the space that we're in, cross-border customers, we're acquiring new customers. With that said and we see that more strongly with the transaction volume, the product utilization and just the fee income from that.

But with that said, there's no question the kind of macro environment and the other drivers are contributing to excess kind of liquidity that some of our clients have. I think what we're really pleased with as far as the deposit growth from consumer and small business in our retail branches, corporate deposits commercial deposits they're all growing nicely in the fee income and the core operating accounts are growing. So we're pleased about that but also kind of realistic as far as there is some excess liquidity here and some fluctuations with some of our customer balances.

And I think that's why we're taking maybe more at this point in time especially where the yield curve is kind of a cautious approach as far as redeploying some of that longer into securities. We'll still continue to do that as I mentioned, but maybe not at that same pace that we did in the first quarter.

[Dave Rochester, Compass Point]

Yes. And then on the rate side you're assuming the current curve persists or any kind of improvement there?

[Irene Oh, Chief Financial Officer]

Current curve. Yes current curve.

[Dave Rochester, Compass Point]

Okay. And then -- appreciate that. And then maybe just my second question if you could just quantify the growth you guys saw in loans and deposits in Hong Kong and China in 2Q that would be great? Thanks.

[Dave Rochester, Compass Point]

Growth in loans in Hong Kong and China was pretty good this quarter about $150 million or so. On the deposit side a little bit of an increase, but not as much. So we ended probably about one point -- excuse me $2.8 billion in Hong Kong and China combined.

[Operator]

The next question will come from Elan Zanger with Jefferies. Please go ahead.

[Elan Zanger, Jefferies]

Thanks. Hi, good morning everyone. Just back on the loan growth I just wanted to check in on the CRE paydowns. I think you're expecting some elevated paydowns possibly in the second quarter. Did those happen? Did you see that? And I guess what's the outlook going forward for that?

[Dominic Ng, Chairman & Chief Executive Officer]

Some do some don't. And so we expect that those we didn't pay down in the second quarter may pay down in the third quarter. And so that is something that we'll see because oftentimes client intention may not necessarily always work down.

[Elan Zanger, Jefferies]

Okay. And to get to the 5% expense guide it assumes a decent uptick in costs in the second half I guess what's driving those costs higher? And does this kind of bake in some sort of pickup in travel-related costs?

[Irene Oh, Chief Financial Officer]

Yes. We have in our kind of forecast assumed a little bit more travel-related costs. It's already happening certainly not to kind of a normalized level. But I'll just kind of maybe remind you like for the first half year-over-year compared to last year, we're at that 5%. So it's really kind of steady from where we're at right now.

Most of the cost increases that we have are related to compensation employees -- new employees that we've hired. We're making more money so bonus accruals are higher there are investments that we made in technology and we're amortizing that. But as you know we are very kind of careful in our expense management. We expect that we'll continue to do so.

[Elan Zanger, Jefferies]

We're also giving more money to charities too. And we're doing well we need to get back to the community.

[Operator]

The next question will come from Brandon King with Truist. Please go ahead.

[Brandon King, Truist]

Good morning. So with the implied improved operating leverage and the updated guidance could there be any plans to pull forward any planned investments?

[Dominic Ng, Chairman & Chief Executive Officer]

What do you mean by planned investment? Can you maybe help us define that a little bit more?

[Brandon King, Truist]

Yes, yes. So I mean so the ongoing business in the business but with operating leverage improving could you potentially pull forward any investments they see in next year or use in advance that you're playing or ongoing?

[Dominic Ng, Chairman & Chief Executive Officer]

No. We just -- we continue to execute according to our strategic business plan. And from a let's say technology investment standpoint or people investment standpoint, we continue to just trying to do it in an orderly fashion and not necessarily that trying to accelerate based on any particular specific situation. But of course there are some -- I mean great opportunity out there that is available. We are always open flexible and then somewhat entrepreneurial to take advantage of it. But outside of any of that I think we just follow out our strategy plan and then execute accordingly.

[Brandon King, Truist]

Okay. And I saw that $400 million in FHLB advances were paid-off in the quarter. I see there is around $250 million remaining. When does that mature? And are you planning to pay that off any time soon?

[Irene Oh, Chief Financial Officer]

Yeah. The rest of the flood matures at various points next year. So we expect to pay that off at that point in time, $175 million in February of next year and then another $75 million in November.

[Operator]

The next question will come from Chris McGratty with KBW. Please go ahead.

[Chris McGratty, KBW]

Great. Good morning.

[Irene Oh, Chief Financial Officer]

Good morning.

[Chris McGratty, KBW]

Hi. Good morning. Maybe a longer-term question on credit quality, obviously the results have been fantastic in part because of the stimulus. But we think about the way your business is today and we kind of fast forward one to two years.

How are you thinking about the overall loss -- normalized losses for East West today than maybe pre-pandemic?

[Irene Oh, Chief Financial Officer]

Yeah, that's a great question. I think if you look at our portfolio and the categories of loans that we have the main category CRE, C&I and SFR certainly, historical experience that we've had from the residential portfolio has been excellent, right? Losses have been really negligible.

On the CRE side as well, historically, if you think about ex construction during the credit crisis income-producing CRE has also -- the credit quality has been good particularly relative to peers.

I think on the C&I side, what we're trying to do is, make sure we don't have too many concentrations in one area or one sector, to ensure that our credit quality is something that continues perhaps kind of the good trajectory we have right now.

So when we look at that we're very careful. And I think there were some questions earlier during the call as far as rate versus structure. But particularly I think for the commercial loan CRE, C&I we're careful from the perspective of not giving up a structure for covenants for rate.

[Chris McGratty, KBW]

Okay, great. And if I could just add kind of a modeling question, I think you said 15% of the tax rate. Do you have what the remaining associated AM would be if that runs through the P&L?

[Irene Oh, Chief Financial Officer]

Yeah. At this point in time we think it's going to be about $70 million for the rest of 2021 maybe a little bit more in the third quarter, Chris.

[Chris McGratty, KBW]

$70 million got it. Thank you.

[Operator]

The next question will come from David Chiaverini with Wedbush Securities. Please go ahead.

[David Chiaverini, Wedbush Securities]

Hi. Thanks. I had a follow-up on C&I loan growth. Could you talk about the pipeline and the opportunity within some of the higher growth areas such as private equity? And I think you called out entertainment and clean energy. Could you talk about that? And any new team hires that's helping that growth?

[Dominic Ng, Chairman & Chief Executive Officer]

We continue to sort of like strategically add new talent into various teams. So -- for example like -- but in entertainment actually we only add one full-time individual.

However, I think just that the team for the last six to nine months has been going very strong. And what we will find is that the beauty of this diversification strategy is that we have so many different industry verticals -- and we have so many -- well, I wouldn't say so many we have quite a few very attractive geographic footprint and various areas such as from New York to Texas to Washington State to Massachusetts. And then of course we've got our lion's share business in the state of California. And let's not forget that we do have Hong Kong and also offices in China.

So, they are at various time would have stronger performance one quarter over next. So, if you recall I think last year, we mentioned private equity quite a bit. The last six months they have not yet had the kind of strong performance like entertainment or clean energy. But I would expect that maybe in the next two quarters, I stop mentioning them again. So, we obviously have many different sectors that we can sort of like get the engine going.

And don't forget we had substantial balances in the manufacturing, wholesale distribution, and also even international trade. So, any different sectors can potentially rise up. And it just -- I would say that -- but if you look at the second quarter entertainment, clean energy, and general, C&I related to manufacturing and wholesale all the few that actually have better performance than the others.

But it will keep changing and it will keep changing. That's the whole idea because they are all strong teams and one way or the other, there are going to be quarters that some is going to do better than the other and so forth.

[David Chiaverini, Wedbush Securities]

That's helpful. Thanks for that. And a follow-up on credit quality. You had called out the CECL day one reserve of 1.39%. Is that still the right sort of benchmark to think about where the reserve to loan ratio should bottom out here?

[Irene Oh, Chief Financial Officer]

I don't have a crystal ball on this. I have to say that. But when we look at -- and also I want to kind of point out the largest driver for this is really the macroeconomic forecast which is very different than day one CECL.

With that said, I mean I think if you look at the trajectory of where we're at right 1.52% and down from a peak earlier of close to 1.80% and CECL day 1 1.39%, I think it's realistic that we could get down to that level David.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Dominic Ng for any closing remarks. Please go ahead sir.

[Dominic Ng, Chairman & Chief Executive Officer]

Well, thank you all for joining our call today and I'm very much looking forward to speaking with all of you sometime in October. Thank you.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.