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. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ms.
Juliana Baliska, Director of Investor Relations. Please go ahead, ma'am.
Thank you, Chuck. Good morning, and thank you, everyone, for joining us to review the financial results of East West Bancorp for the Q2 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 more detailed descriptions of the risk factors that could affect the company's operating results, please refer to our filings with the Securities Exchange Commission, including our annual report on Form 10 ks 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 Q1 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.
Thank you, Juliana. 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 Q2 2021 net income of $225,000,000 or $1.57 per share. This was an increase of 10% from $205,000,000 in the Q1.
Highlights of our strong performance include
Perhaps you're muted.
Hello. In the Q2, we earned $283,000,000 in pretax pre provision income on total revenue of $445,000,000 Our pre tax pre provision income grew by 8% linked quarter all 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 percent of average assets, reflecting East West's 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 $15,000,000 provision for credit losses in the 2nd quarter compared with a 0 provision in the 1st quarter.
In sum, we returned an attractive 1.56% on average assets, 16.6% on average equity and 18.3 percent on average tangible equity for the Q2 of 2021. Slide 4 presents a summary of our balance sheet. As of June 30, 2021, total loans reached a record of $40,100,000,000 including $1,400,000,000 of Paycheck Protection Program loans. Excluding PPP, total loans grew by 12% annualized from March 31, 2021. 2nd quarter production was distributed across residential mortgage, C and I and commercial real estate.
Year to date, for the first half of twenty twenty one, 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% figures. As you can see on this slide, our portfolio is somewhat equally weighted between the 3 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 and I Loans and Smaller Size Multifamily and Commercial Real Estate Mortgages.
Our commercial lending teams, including our specialty lending verticals, serve our middle market and corporate C and I and CRE customers. The teams are expanding existing customer relationships and gaining new market share, driving solid balance sheet growth. In the Q2, deposit growth continued to be very strong. As of June 30, 2021, total deposits reached a record of $52,600,000,000 up to $3,000,000,000 or 25 percent annualized from March 31. Non interest bearing deposits grew RMB2.9 billion or 61 percent annualized to a record RMB21.8 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, corporate 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 17,300,000. Turning to Slide 5, You can see our strong capital ratios.
As of June 30, 2021, we had 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 Q3 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 and I loans outstanding excluding PPP were RMB12.4 billion as of June 30, 2021, an increase of 12% annualized from March 31.
Total C and I commitments were RMB17.7 billion as of June 30, A sequential increase of 10% annualized. On an average basis, C and I loans excluding PPP grew by 6% annualized in the Q2. Growth was well diversified by industry and reflected great performance across our footprint And Teams, I would highlight general C and I production in California as well as contribution from our China and New York based teams. By industry, I would highlight Entertainment, Clean Energy and General Manufacturing and Wholesale. Slide 7 and 8 showed essential details of our commercial real estate portfolio.
Total commercial real estate loans were $15,400,000,000 as of June 30, 2021, up by 8% annualized from March 31. From the past several quarters, our origination volume, especially from Smaller size CRE clients has been consistent. We also benefit from our geographic footprint outside of California. In the second quarter, Texas bolstered overall CRE growth. In Slides 910, we provide details regarding our residential mortgage portfolios.
During the Q2, we originate $1,200,000,000 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 RMB10,700,000,000 as of June 30, 2021, growing by 18% annualized from March 31. I will now turn the call over to Irene for a more detailed discussion of our asset quality and income statement.
Eiry?
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 $1,000,000,000 as of June 30, 2021 or 2.6% of total loans. We saw improvement across all significant loan portfolios.
Non performing assets were down by 13% to $226,000,000 for 38 basis points of total assets as of June 30. 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 paydowns, reduce oil and gas criticized loans to 26% and non accrual loans to 7% of the portfolio. Accordingly, we released $34,000,000 of loan loss reserves. Allowance coverage of oil and gas loans was 9.8% as of June 30, compared with 11.6% as of March 31.
On Slide 12, we present the components of our allowance for loan losses. Our allowance totaled $586,000,000 as of June 30, or 1.52 percent of loans excluding PPP, compared with $608,000,000 or $162,000,000 as of March 31 and compared with $139,000,000 on Day 1 post CECL. Net charge offs decreased to $13,300,000 in the 2nd quarter from $13,400,000 in the 1st quarter. The 2nd quarter net charge off ratio was 13 basis points of average loans annualized, an improvement of 1 basis point from 14 basis points annualized in the Q1. During the Q2, we recorded a negative $15,000,000 provision for credit losses compared with 0 provision in the Q1.
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 $7,000,000 sequentially, reflecting higher valuations of CRA, SBIC investments during the quarter.
Included in interest rate contracts and other derivatives Our mark to market adjustments, which were $5,000,000 loss in the 2nd quarter compared with a $14,000,000 gain in the 1st quarter. These primarily relate to changes in the credit valuation adjustment. The 2nd quarter income tax expense was $46,000,000 and effective tax rate was 17%. The year to date effective tax rate for the first half of twenty twenty one 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.
2nd quarter average loans of $39,600,000,000 grew by $900,000,000 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. 2nd quarter average deposits of $50,200,000,000 We're up by $2,300,000,000 or 20 percent 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 2nd quarter, down from 81% in the Q1.
Average earning asset growth in the 2nd quarter reflected the strong deposit growth year to date. On average basis, Securities available for sale increased by $1,500,000,000 and repo assets increased by $700,000,000 This was partially offset by a $1,000,000,000 decline in average interest bearing cash and cash equivalents as we deployed some of our excess liquidity. Overall, the mix of average earning assets was higher yielding in the 2nd quarter. During the Q2, dollars 400,000,000 of FHLB funding, which carried an effective interest rate of 2.25 percent matured and was paid off. Turning to Slide 15, Q2 2021 net interest income of $376,000,000 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 2nd quarter, an increase of 4 basis points from the prior quarter. Income related to PPP loans was $15,000,000 in the 2nd quarter and included $11,000,000 of deferred loan fees, similar to the amount in the Q1. As of June 30, 2021, We had $26,000,000 of PPP deferred loan fees remaining to accrete into income. As you can see in the waterfall chart on this slide, The 4 basis point quarter over quarter increase in the net interest margin breaks down as follows: plus 3 basis points each from a lower cost of interest bearing deposits and from the deployment of excess liquidity, partially offset by minus 1 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 2nd quarter average loan yield was 3.57 and excluding the impact of PPP, the adjusted loan yield was 3.58, down slightly by 2 basis points from 3.60 for the first quarter. Turning to Slide 17.
Our average cost of deposits for the 2nd quarter dropped to 14 basis points, an improvement of 4 basis points from the Q1. The spot rate of total deposits as of June 30 was 13 basis points, down by 3 basis points from March 31st, our cost of deposits declined as maturing higher rate CDs repriced to current market rates and we decrease rates paid on money market and interest bearing checking accounts. We expect to further reduce our cost of deposits at maturing CDs reprice over the second half of twenty twenty one, 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 Q1. In the Q2, we originated or renewed $4,500,000,000 of domestic CDs at a blended rate of 19 basis points and a weighted average duration of 4 months.
We have 9 27,000,000 of CDs maturing in the 3rd quarter at a blended rate of 55 basis points and another $1,000,000,000 in the 4th quarter at a blended rate of 35 basis points. Moving on to fee income on Slide 18. Total non interest income in the 2nd quarter was $68,000,000 And this reflects the non cash items noted on Slide 13. 2nd quarter fee income and net gains on sales of loans were $63,000,000 up by $8,000,000 or 15% from the Q1. 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 3rd 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. 2nd quarter non interest expense was $189,500,000 excluding amortization of tax credits and other investments and core deposit intangible Amortization. Adjusted non interest expense was $161,500,000 in the second quarter, a decrease of $3,000,000 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 2nd quarter adjusted efficiency ratio was 36.3% compared with 38.7% in the Q1. 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.
Thank you, Irene. In closing, we had a very strong Q2 and expect that to continue for the rest of the year. While the hard work and excellent execution All of our associates drive our results and it's a true testament of the culture of East West. I would now open up the call to questions. Operator?
Thank you. We will now begin the question and answer session. And the first question will come from Ebrahim Poonawala with Bank of America. Please go ahead.
Good morning.
Good morning. I guess,
just first question maybe for Eileen 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 these assets that you're adding and just overall assets Sensitivity of the bank as we think about eventually short rates going higher?
Yes. Great question, Ebrahim. Certainly, I think our view from what we the actions that we took in the Q1 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 Q1 when the tenure was higher and we redeployed about $2,000,000,000 into a longer duration securities and repos.
The repos, they're 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.
Got it. And I guess A question, Dominic, for you means loan growth seems to be very strong, deposit growth is very strong. Give us a sense now that you had like 6 to 9 months under the Biden administration. The headlines around U. S, 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.
Good question. Well, first of all, I think 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, well, The political rhetoric is 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 U.
S. And China. And now the headline news about some of the large investment May not be coming, but you have to understand that from East West Bank perspective, we are mainly focusing on the Midsize Business and they are 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 4 years, under the Trump administration, there are a lot of not only just rhetoric, but also actual 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 4 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 U.
S.-China space and this is something that we are really good at. If I look at just the last 2 quarters. We have very diversified growth in our China operation And we have very diversified growth in U. S. From our cross border business and spread from Clean Energy, General Manufacturing, Wholesale, Consumer Goods to private equity, etcetera.
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 centered banks who actually for the last 6 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 charter that 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 serving cross border business. And but what we have done is for 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, ethics capability, etcetera. The whole idea is that we build a platform.
We build Product capability that fit the customer needs that are in the cross border business, whether there are U. S. 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. 4, 5 years ago, it was half aspiration, Have capability. Today, we have a lot more capability from a technical standpoint.
So when you see the growth of fee income in treasury management, when you see the fee income of foreign exchange We have this record fee income in this quarter and the deposit, nice deposit growth DDA and so forth and together with loans. It's 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 4 years ago weren't able to do certain type of like foreign exchange or maybe certain type of cash management relationship with us because There are a 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.
The next question will come from Ken Zerbe with Morgan Stanley. Please go
ahead. 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, Does resi continue to be the main driver?
Or do you think the C and I could actually start picking up a fair bit from here?
I've been predicting the demise of single family mortgages for the last 4, 5 years and I was wrong every single year. So somehow, every 2 quarters, I start talking internally with our team and saying that I'm not sure that Single family mortgages origination can sustain in this level. And so my mortgage Department continue to pleasantly surprised me because I thought Q4 last year was that all time high. There's no way that we can ever beat that. And then Q1, just beat that.
And then I thought it will be over and then Q2 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, it 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 and 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 weight of T and I, CRE and single family. And so if one particular area It's slowing a little bit. Hopefully, the other 2 will pick up. And so far, that's been working just like that.
And I would expect that Maybe when the economy starts picking up even more and East West continue to so far we've been able to for the last 12, 24 months, we've been continuing getting new C and I customers. And just as a matter of math, Because we get so many new C and I customers, at some point, the balance will grow. And so I expect that, that C and I will continue to grow. And hopefully, if at the time that single family is slowing down a little bit, the C and I will step up a little bit more. So that's what we see at this point, but so far things look pretty good.
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 0, But obviously, it came in below that. Is it fair to assume that a or is it fair to expect A negative provision expense in the back half of the year?
Ken, my original expectation was that it would be 0 along with your expectation I think at this point, given our portfolio, given the trajectory, We're comfortable with SAIC. It's 0 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 2.10 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 0 provision for the second half of the year.
The next question will come from Jared Shaw with Wells Fargo Securities. Please go ahead.
Hi, good morning.
Good morning.
I guess my first question more on Liquidity and when you look at the commercial customers that are stepping back up and borrowing today, are they doing so while still keeping high levels of liquidity on their own balance And then how should we think about future loan growth? Will that potentially be offset by potential deposit outflows with the loan to deposit ratio normalizing?
Jared, well, a lot of the new growth that we've had and the balance increases that you're seeing on the C and I side in particular It is really new customer acquisition. I think if you look at it and if we look just in general for our C and I customers, Overall utilization rates are pretty flattish. And overall, when we look at the financials of our C and I 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.
Yes, yes, 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 a 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?
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 economy opening up a little bit, There's to a certain degree there's that. But I think, again, going back on an 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 size clients signing up with our cash management services that maybe 2, 3 years ago, 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 that 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 there So much more cross border, both from the consumer and commercial side.
In addition to that, in terms of wealth management, again, that's a share 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 continuing to be 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.
The next question will come from Brock Vandervliet with UBS. Please go ahead.
Hi, guys. This is Havilas Abraham in for Brock. Just maybe starting off on C and 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?
We have again, Going back to a very diversified group from industry perspective, from geographic perspective, There are always certain type of business that like all the community banks or maybe regional banks or heavily engaged in. And for those business, there are some competitive pressure. There are others like some of our cross border business That will 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 and I loans and with many different sectors allow us to somewhat blend it into Where we are today. So I looked at it is that there's always going to be pressure 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 worked out.
So that's why you see that very stable type of loan yield.
Okay. And just my second question, can you talk a little bit more about East West CRE 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.
Well, 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 1,000,000,000 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 and 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.
The next question will come from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good morning. Good morning. 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?
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're willing to just going down the same path. 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 relationship. 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 that's going on among some of these other smaller community banks. 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, so it's like based on the 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.
Okay. And then, in multifamily, you had a nice step up after remaining fairly stable the last 12 months. Have you changed your appetite there? And where is that growth coming from within your markets?
Yes. That growth is really coming largely from Southern California and then also to Dominic's points earlier also our Texas teams as well. But no change in our strategy or direction.
The next question will come from Dave Rochester with Compass Point. Please go ahead.
Hey, good morning guys.
Good morning.
My first question would be on deposit growth. That has been fantastic here. I remember in the Q1, 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 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'd be great.
Yes. Great question, 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 nice And 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 of a at this point in 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 Q1.
And then on the rate side, you're assuming the current curve persists or kind of improvement there?
Current curve.
Yes. Okay.
Yes. Current curve.
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'd be great. Thanks.
Growth in loans in Hong Kong And China was pretty good this quarter, about $150,000,000 or so. On the deposit side, a little bit of an increase, but not as much. So we ended probably about Excuse me, dollars 2,800,000,000 in Hong Kong and China combined.
The next question will come from Ilan Zanger with Jefferies. Please go ahead.
Thanks. Hi. Good morning, everyone. Just back on the loan growth, I just wanted to check-in on the CRE pay downs. I think you're expecting some elevated pay downs possibly in the second quarter.
Did those happen? Did you see that? And I guess what's the outlook going forward for that?
Some do, some don't. And so we expect that those 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.
Okay. 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?
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 and we expect that we'll continue to do so.
We're also giving more money to charity too. We're doing well. We need to give back to the community.
The next question will come from Brandon King with Truist. Please go ahead.
Good morning. Good morning. Good morning. Yes. So with the implied improved Operating leverage and the updated guidance, could there be any plans to pull forward any planned investments?
What do you mean by planned investment? Can you maybe Help us define a little bit.
Yes, yes.
So I mean, so
the ongoing investments in the business, but with operating leverage improving, Could you potentially pull forward any investments, let's say, in next year or years in advance that you were planning on ongoing?
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, if there is some 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 our strategy plan and then execute accordingly.
Okay. And I saw that $400,000,000 in FHLB advances were paid off in the quarter. I see there's around $250,000,000 remaining. When does that mature and are you planning to Pay that off anytime soon.
Yes, the rest of the flood matures at various points next year. So we expect to pay that off at that point in time. Dollars 175,000,000 in February of next Here and another 75 in November.
The next question will come from Chris McGratty with KBW. Please go ahead.
Great. Good morning.
Good morning.
Maybe a longer term question on credit quality. Obviously, the results have been fantastic in part because of the stimulus. But if we think about the way your business is today, and we kind of fast forward 1 to 2 years. How are you thinking about the overall loss normalized losses for East West today than maybe pre pandemic?
Yes, 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 and I and SFR, certainly historical experience that we've had from the residential Has been excellent, right? Losses have been really negligible. On the CRE side as well, historically, ex If you think about ex construction during the credit crisis, our income producing CRE has also the credit quality has been good, particularly relative to peers. I think on the C and 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. Sure. But particularly, I think for the commercial loan CRE, C and I, we're careful from the perspective of not giving up a structure for covenants for rate.
Okay, great. And if I could just add kind of a modeling question. I think you said 15% on the tax rate. Do you have what the remaining Associated Anne would be, if that runs through the P and L?
Yes. At this point in time, we think it's going to be about $70,000,000 for the rest of 2021, Maybe a little bit more in the Q3, Chris.
$70,000,000 Got it. Thank you.
The next question will come from David Chiaverini with Wedbush Securities. Please go ahead.
Hi, thanks. I had a follow-up on C and 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?
We continue to sort of like strategically add New talents into various teams. So, for example, But in entertainment, actually, we only add 1 full time individual. However, I think just that The team for the last 6 to 9 months has been going very strong. And what we'll 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 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, at various times, Would have stronger performance 1 quarter over next. So if you recall, I think last year, We mentioned private equity quite a bit. The last 6 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'll start mentioning them again.
So we obviously have many different sectors that we can sort of like to get the engine going. And don't forget, we got 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 2nd quarter, Entertainment, Clean Energy and General C and I related to manufacturing and wholesale, all those a 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 someone is going to do better than the other and so forth.
That's helpful. Thanks for that. And follow-up on credit quality, you had called out the CECL day 1 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?
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 1 CECL. With that said, I mean, I think if you look at the Trajectory of where we're at, right, 152 and down from a peak earlier of close to 180 And CECL Day 1, 139, I think it's realistic that we can get down to that level, David.
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.
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.
The conference has now concluded. Thank you for attending today's presentation.