Earnings Call Transcript - EWBC Q2 2021

Operator, 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. After today’s presentation, there will be an opportunity to ask questions. 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 of 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 description 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 and CEO

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. In the second quarter, we earned $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'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 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's 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 contributions from our China and New York-based teams. By industry, I would highlight clean energy and general manufacturing and wholesale. Slide 7 and 8 show 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, has 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% 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.

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 30, 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 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 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. The 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 million as of June 30 or 1.52% of loans excluding PPP compared with $608 million or 1.62% as of March 31 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. 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 30 was 13 basis points, down by three basis points from March 31. 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 repriced 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 investment 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 is 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 is 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 and CEO

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 to 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. And the first question will come from Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala, Analyst

Good morning.

Dominic Ng, Chairman and CEO

Good morning.

Ebrahim Poonawala, Analyst

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, that's a great question, Ebrahim. Our perspective has evolved due to the decline in long-term rates following the actions we took in the first quarter. While we plan to reinvest some of our excess cash, we are currently hesitant to extend our durations too far. We will approach our investments with more caution compared to the first quarter, when we reinvested around $2 billion into longer-term securities and repos. In the current environment, we find repos and variable rate options more appealing, and the securities we are acquiring now are primarily MBS and CMOs with a rate of about 1.5.

Ebrahim Poonawala, Analyst

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 and CEO

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 gains 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 the 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's perspective, we are mainly focusing on midsize businesses, and they're not the high-profile business and 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 were a lot of not only just reverts 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. The 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 the US from our cross-border business and spread from clean energy, general manufacturing, wholesale, consumer goods to private equity, etc. 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 for the growth is not that unlike the multinational companies or the money center banks, who actually for the last six months or so have been stepping up and investing in China. You've 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 focusing on our strategy of being the bridge between the East and West in certain cross-border businesses. 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, etc. 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 investments 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 nice deposit growth DDA and so forth together with loans is no surprise because we have built up the capability that allows 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 types of foreign exchange or maybe certain types of cash management relationships with us because of the little bit lack of capability in the past that we were able to correct. 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 are enormous for East West Bank, which has the strong expertise to continue to expand in this direction.

Operator, Operator

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

Ken Zerbe, Analyst

Thank you. Good morning. When considering loan growth moving forward, residential mortgages have been a significant driver of that growth. However, as we look toward the second half of the year and into 2022, will residential continue to be the primary driver, or do you expect that C&I might start to gain some momentum?

Dominic Ng, Chairman and CEO

I have been predicting the decline of single-family mortgages for the past four to five years, and each year I have been proven wrong. Every two quarters, I find myself discussing with our team whether single-family mortgage origination can maintain its current level. My mortgage department has continually surprised me; I thought the fourth quarter of last year was a peak that couldn't be surpassed, yet the first quarter exceeded that performance. Then I anticipated a decline, but the second quarter also achieved record results. I do expect that eventually, this will taper off, but right now the pipeline looks strong and origination appears to be ongoing. I can't predict when we might see a slowdown. Meanwhile, we are confident in our growth in commercial and industrial (C&I) and commercial real estate (CRE). We aim for a balanced strategy, as evidenced by our diverse balance sheet that includes relatively equal rates of C&I, CRE, and single-family mortgages. If one area slows, we hope the others will compensate. So far, this strategy has been effective. I anticipate that as the economy improves, East West will continue attracting new C&I customers, and with the growing number of these customers, our balance will also increase. I expect C&I to keep growing, and ideally, even if single-family experiences some slowdown, C&I will pick up some of the slack. For now, things look promising.

Ken Zerbe, Analyst

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 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, Operator

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

Jared Shaw, Analyst

Hi. Good morning.

Dominic Ng, Chairman and CEO

Good morning.

Jared Shaw, Analyst

My first question is about liquidity. Are the commercial customers who are increasing their borrowing still maintaining high levels of liquidity on their balance sheets, and how should we consider future loan growth? Could that potentially be balanced out by possible deposit outflows as the loan-to-deposit ratio returns to normal?

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 flat. 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, Analyst

That's good to know. Regarding fee income, we are experiencing significant growth and have positive guidance. Are you noticing any pent-up demand now that restrictions are easing, or do you believe this is simply a return to normal with an expectation of steady growth as volume and capacity continue to rise?

Dominic Ng, Chairman and CEO

I'm confident that some of this growth is a rebound from 2020, particularly with more vaccinations and the economy beginning to reopen. From East West Bank's perspective, we have acquired many new customers. Additionally, many of our larger, more sophisticated clients are now utilizing our cash management services, which were previously held by money center banks. These clients are increasingly choosing to move their deposits to us, allowing us to capture a larger share of their business. This shift drives additional fee income in our treasury management services. Furthermore, there is an increase in cross-border transactions on both the consumer and commercial fronts. In wealth management, our growth is primarily due to acquiring more customers rather than enhancing our platform. We anticipate continuing to pursue this strategic direction, focusing on maintaining a diversified client base to mitigate the risks associated with concentrated growth. This is our plan moving forward.

Operator, Operator

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

Vilas Abraham, Analyst

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 and CEO

We have, again going back to a very diversified group from industry perspective, from a geographic perspective, there are always some types 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. 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 pricing that makes it work out. So that's why you see that very stable type of yield.

Vilas Abraham, Analyst

Okay. And just my second question. Can you talk a little bit more about East West’s 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 and CEO

Our Texas team is performing exceptionally well. We are focused on keeping our oil and gas exposure below $1 billion, and progress in that area has been positive. Additionally, our asset quality metrics have improved significantly. Meanwhile, our commercial and industrial, as well as commercial real estate sectors in Texas, are experiencing strong growth. The market is thriving, we have a talented team in place, and we anticipate ongoing robust growth in Texas.

Operator, Operator

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

Matthew Clark, Analyst

Hey, good morning.

Dominic Ng, Chairman and CEO

Good morning.

Matthew Clark, Analyst

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 and CEO

There is always competition, especially in commercial real estate, that tends to drive prices down. We could have pursued a similar strategy, but our priority is to focus on our long-term customers while also building new relationships. We have value-added services that help us maintain pricing better than the downward trends affecting some of the smaller community banks. We believe it's unnecessary for us to adopt that approach. Many of those banks are lowering prices based on their yield curve, and this could hurt them in the long term when the interest rate environment shifts. We are considering both short-term and long-term impacts and are committed to acting prudently.

Matthew Clark, Analyst

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, Operator

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

Dave Rochester, Analyst

Hey, good morning, guys.

Matthew Clark, Analyst

Good morning.

Dave Rochester, Analyst

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, Analyst

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, Analyst

Okay, I appreciate that. For my second question, could you quantify the growth in loans and deposits in Hong Kong and China during the second quarter? That would be great. Thanks. 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 $2.8 billion in Hong Kong and China combined.

Operator, Operator

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

Elan Zanger, Analyst

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 and CEO

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, Analyst

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 incorporated some additional travel-related costs in our forecast. While it's not yet at a normalized level, year-over-year for the first half, we are seeing a 5% increase compared to last year. This reflects a steady situation from our current position. The main drivers of our cost increases are related to employee compensation, particularly from new hires. As our earnings grow, so do the bonuses we are accruing, and we are also investing in technology, which we are gradually amortizing. We remain vigilant in managing our expenses and plan to continue doing so.

Elan Zanger, Analyst

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

Operator, Operator

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

Brandon King, Analyst

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 and CEO

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

Brandon King, Analyst

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 and CEO

No. We continue to execute according to our strategic business plan. From a technology investment or people investment standpoint, we are working to do it in an orderly fashion and are not trying to accelerate based on any specific situation. However, there are great opportunities available that we remain open and flexible to take advantage of. Outside of that, we are focused on following our strategic plan and executing accordingly.

Brandon King, Analyst

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, Operator

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

Chris McGratty, Analyst

Great. Good morning.

Irene Oh, Chief Financial Officer

Good morning.

Chris McGratty, Analyst

Hi. Good morning. I have a longer-term question regarding credit quality. The results have been excellent, partly due to the stimulus. As we look at your business today and project one to two years ahead, how do you view the overall normalized losses for East West compared to pre-pandemic levels?

Irene Oh, Chief Financial Officer

That's an excellent question. When we look at our portfolio and the types of loans we have, the main categories—commercial real estate, commercial and industrial, and single-family residential—historically, we've seen great performance in our residential portfolio with very minor losses. On the commercial real estate side, especially looking beyond construction during the credit crisis, we’ve maintained good credit quality in income-producing properties, particularly when compared to our peers. For commercial and industrial loans, we are focused on avoiding excessive concentrations in any one area or sector to help maintain our current positive credit quality trajectory. We are being very cautious in this regard. There were earlier questions about the balance between rate and structure, but we are particularly careful in the commercial loan space, ensuring we don’t swap important covenants for better rates.

Chris McGratty, Analyst

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.

Operator, Operator

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

David Chiaverini, Analyst

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 and CEO

We are strategically adding new talent to our teams. For instance, in the entertainment sector, we have added just one full-time individual. Nonetheless, the team has been performing strongly over the last six to nine months. The strength of our diversification strategy lies in the variety of industry verticals we cover and our attractive geographic presence, ranging from New York to Texas, Washington State, and Massachusetts, with a significant business share in California, as well as operations in Hong Kong and China. At times, different sectors will show stronger performance in various quarters. Last year, we talked a lot about private equity, but in the past six months, it hasn't performed as well as entertainment or clean energy. I expect that in the next two quarters, I might not mention private equity again. We have multiple sectors that can drive growth, and it's important to note that in the second quarter, entertainment, clean energy, and manufacturing-related sectors performed better than others. This performance will continue to fluctuate, which is the essence of our strategy, as we have strong teams, ensuring that some will excel while others may lag in different quarters.

David Chiaverini, Analyst

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 can't predict the future, but when we consider the macroeconomic forecast, it differs significantly from day one CECL. Currently, we're at 1.52%, down from a peak of nearly 1.80%, and the day one CECL was 1.39%. I think it's reasonable to expect that we could reach that level again, David.

Operator, 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 and CEO

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, Operator

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