Earnings Call Transcript - EWBC Q1 2021

Operator, Operator

Good morning, and welcome to the East West Bancorp First Quarter 2021 Financial Results Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to Julianna Balicka, Director of Strategy and Corporate Development. Please go ahead.

Julianna Balicka, Director of Strategy and Corporate Development

Thank you, Betsy. Good morning, and thank you, everyone, for joining us to review the financial results of East West Bancorp for the first quarter of 2021. With me on this conference call are Dominic Ng, our Chief Executive Officer and Irene Oh, our Chief Financial Officer. We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For a more detailed description of 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 experiencing some technical difficulties with part of the webcast and 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 our Chairman and CEO, Dominic Ng.

Dominic Ng, CEO

Thank you, Julianna. Good morning. 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 first quarter 2021 net income of $205 million or $1.44 per share, which was up by 25% quarter-over-quarter. The first quarter was a strong start to the year. Highlights include strong loan and deposit growth, robust revenue growth and decreasing operating expenses, all driving pretax pre provision growth of 4% or 17% annualized. In the first quarter, we earned $262 million of pretax pre provision income on total revenue of $427 million. Furthermore, due to an improved macroeconomic outlook and stable asset quality we did not record any provision for credit loss in the first quarter. We returned 1.5% on average assets, 15.6% on average equity and 17.2% on average tangible equity for the quarter. Our attractive returns reflect the strong financial performance in the first quarter of 2021. Slide 4 presents a summary of our balance sheet. As of March 31, 2021, total loans reached a record of $39.6 billion, growing by $1.2 billion or 13% annualized from December 31, 2020. Paycheck Protection Program loans totaled $2.1 billion as of March 31, 2021. During the first quarter, the company funded 5,075 new PPP loans totaling $828 million. Since the PPP program launched in 2020, East West Bank funded a total of 12,517 loans totaling $2.6 billion through March 31, 2021. Excluding PPP, total loans grew by 8% linked quarter annualized in the first quarter at the top of our previous guidance range for the year. Accordingly, based on current pipelines and economic trends, we are updating our loan growth outlook for the full year to 8% compared with a range of 6% to 8% previously. First quarter average loan of $38.7 billion grew by 11% linked quarter annualized or 9% annualized excluding PPP. Growth was broad based across all our major loan portfolios with the strongest growth from residential mortgage. Deposit growth for the quarter was exceptional. As of March 31, 2021, total deposits reached a record of $49.5 billion, growing by $4.7 billion or 42% annualized from December 31st. Noninterest bearing deposits grew 65% annualized to a record $18.9 billion as of March 31, 2021, making up 38% of total deposits as of March 31st, up from 36% a quarter ago and up from 31% a year ago. We are pleased with the deposit growth and related growth in deposit account fees, which are up 47% year-over-year to $15.4 million. We have continually invested in our digital banking platform and treasury management product capabilities, allowing us to win large customers with more complex cash management needs. At the same time, we have developed deposit products tailored to meet the needs of our small business customers, a segment that has been growing nicely for some time now. Our ability to compete for and win both large and small deposit customers laid a good foundation for future growth as the economy recovers and business activity increases. Turning to Slide 5. You can see our strong capital ratio. As of March 31, 2021, we had a common equity Tier 1 ratio of 12.7% and a total capital ratio of 14.3%, which provides us with a meaningful capacity to support all of our customers in their growth and expansion plans as the economy reopens and bounces back from COVID-related restrictions. East West Board of Directors has declared second quarter 2021 dividends for the company's common stock. The common stock cash dividend of $0.33 is payable on May 17, 2021, to stockholders of record on May 3, 2021. Moving on to a discussion of our loan portfolio, beginning with Slide 6. C&I loans outstanding excluding PPP were $12 billion as of March 31, 2021, declining to $55 million or 2% annualized from December 31, 2020. Total C&I commitment was $17.2 billion as of March 31, 2021, a quarter-over-quarter increase of $137 million or 3% annualized. The decline in outstanding balance reflects paydown in January, but on an average basis, C&I loans excluding PPP grew by 5% annualized in the first quarter. We are comfortable that our C&I loan growth will accelerate through the year based on our year-to-date growth and commitments, current pipelines and a strengthening economy. As you know, it takes time for commitments to materialize into balance outstanding. Slide 7 and 8 show the essential details of our commercial real estate portfolio. Total commercial real estate loans were $15.1 billion as of March 31, 2021. This portfolio grew by $280.5 million or 8% annualized from December 31, 2020. On an average basis, total CRE loans grew by 6% annualized in the first quarter. This run rate of growth is stronger than we had originally expected because of higher origination volume from our core traditional CRE lending customers as well as lower than anticipated payoffs. We expect the CRE payoffs to tick up in the second quarter. But for the full year, we are comfortable that our total CRE loan growth will be supported by continued good demand from our customers as the economy reopens and rebounds. In Slide 9 and 10, we provide details regarding our single-family residential loans and home equity lines. During the first quarter, we originated $1.1 billion of residential mortgage loans, an increase of 5% quarter-over-quarter and 45% year-over-year. This was a record quarter of residential mortgage originations for East West, and we are seeing the momentum continue into April. Single-family residential loans were $8.5 billion as of March 31, 2021. This portfolio grew by $338 million or 17% annualized from December 31st. On an average basis, single-family residential loans grew by 16% annualized in the first quarter. Home equity lines outstanding were $1.7 billion as of March 31, up $147 million or 37% annualized from December 31st. Including unfunded commitments, total commitments on home equity lines were $3.6 billion, as of March 31st, up by 32% linked quarter annualized. The utilization rate remained steady at 48%. On an average basis, home equity lines grew by 28% annualized in the first quarter. I will now turn the call over to Irene for a more detailed discussion on asset quality and the income statement.

Irene Oh, CFO

Thank you, Dominic. I'll start with our asset quality metrics on Slide 11. Our criticized loans were $1.2 billion as of March 31st or 3.1% of total loans, essentially unchanged from $1.2 billion as of December 31st or 3.2% of total loans. Quarter-over-quarter, special mention loans decreased to $504 million as of March 31st, down from $565 million as of December 31st. Classified loans increased to $713 million, up from $653 million as of year-end. Nonperforming assets were $258 million or 45 basis points of total assets as of March 31st compared with $235 million or 45 basis points of total assets as of December 31st. New migration into adversely graded loans in the first quarter was limited, resulting in stable criticized loans quarter-over-quarter. Oil and gas exposures continue to be the largest single concentration in our performing assets, and the operating backdrop for this sector is improving. Outside of oil and gas, we do not see systemic issues in our loan portfolio. Furthermore, at $608 million as of March 31, 2021, we believe that our allowance for loan losses is sufficient to absorb losses in our loan portfolio as well as incremental reserve build needed for new loan growth. We do not expect to record any provision for loan losses for the remainder of the year. On Slide 12, we present the components of our allowance for loan losses. Our allowance for loan losses totaled $608 million as of March 31st or 1.62% of loans held for investment excluding PPP, compared with $620 million or 1.68% as of December 31st and compared with $483 million or 1.39% on day one post CECL. The quarter-over-quarter reduction in the allowance largely reflects an improved macroeconomic forecast. Net charge-offs in the first quarter were $13 million compared with $19 million in the fourth quarter. The first quarter net charge-off ratio was 14 basis points of average loans annualized, an improvement of 6 basis points from the fourth quarter of 2020. This improvement primarily reflects a decrease in commercial real estate charge-offs. During the first quarter, we recorded no provision for loan losses compared to $24 million in the fourth quarter. And now moving to a discussion of our income statement on Slide 13. This slide summarizes the key line items of the income statement, which I will discuss in more detail in the following slides. First quarter income tax expense was $30.5 million and effective tax rate was 13% compared with $49 million and 23% for the fourth quarter. First quarter income tax expense and effective tax rate reflect the benefit of a higher amount of tax credit investments and discrete items compared with the prior quarter. Also, fourth quarter income tax expense included $8 million related to DC Solar tax credit investments. I'll now review the key drivers of our net interest income and net interest margin on Slides 14 through 17, starting with average balance sheet growth. First quarter average loans of $38.7 billion grew by $1 billion or 11% linked quarter annualized. The growth rate accelerated from the fourth quarter and was broad based across major loan categories, with the strongest growth coming from residential mortgage. First quarter average deposits of $47.8 billion grew by $3.4 billion or 31% linked quarter annualized. All deposit categories grew, led by growth in noninterest bearing demand deposits at a rate of 44% annualized. With the strong deposit growth, our average loan to deposit ratio was 81% in the first quarter, down from 85% in the fourth quarter. During the first quarter, we deployed some cash into debt securities available for sale and also repo assets. On a quarterly average basis, securities AFS increased by $1.4 billion and repo assets increased by $204 million. During the second quarter of 2021, $400 million of our FHLB funding carrying an effective interest rate of 2.25% will mature, which we expect to pay off. Turning to Slide 15. First quarter 2021 net interest income of $354 million grew by 8% linked quarter annualized, and the net interest margin was 2.71%, a decrease of 6 basis points from the prior quarter. Excluding income related to PPP loans, our first quarter adjusted net interest income of $339 million grew by 7% linked quarter annualized. Net interest income related to PPP loans was $15 million in the first quarter compared with $14 million in the fourth quarter. As of March 31st, we had $34 million of PPP loan deferred fees to accrete into income. The 6 basis points quarter-over-quarter decrease in the first quarter GAAP NIM breaks down as follows: plus 5 basis points from a lower cost of interest-bearing deposits, plus 2 basis points from more DDA in the funding mix offset by minus 7 basis points from lower loan yields and minus 6 basis points from excess liquidity due to strong deposit growth. Turning to Slide 16. First quarter average loan loss was 3.58% and excluding the impact of PPP, the adjusted loan yield was 3.60%, down by 9 basis points quarter-over-quarter from 3.69%, reflecting the impact of low interest rates on the portfolio. Turning to Slide 17. Our cost of deposits continued to decline as maturing higher priced CDs repriced to current market rates. Our average cost of deposits for the first quarter dropped to 18 basis points, down from 25 basis points in the fourth quarter. The spot rate of total deposits as of March 31, 2021, was 16 basis points. Our first quarter average cost of interest-bearing deposits dropped to 30 basis points, down from 40 basis points in the fourth quarter. The spot rate of interest-bearing deposits as of March 31st was 26 basis points. The quarter-over-quarter improvement was primarily driven by the repricing of CDs as well as by a decrease in the cost of money market accounts. The average cost of CDs in the first quarter was 50 basis points, a meaningful drop of 24 basis points from 74 basis points in the fourth quarter. In the first quarter, we originated or renewed $5.4 billion of domestic US CDs at a blended rate of 20 basis points and a weighted average term of four months. We have $964 million of CDs maturing in the second quarter at a blended rate of 62 basis points and another $817 million in the third quarter at a blended rate of 61 basis points. Moving on to fee income on Slide 18. Total noninterest income in the first quarter was $73 million, up from $70 million in the fourth quarter. First quarter fee income and net gains on sales of loans were $55 million, growing by 14% annualized from the fourth quarter. Higher forward exchange income, wealth management and deposit account fees reflected growth in customer-driven transactions for these business lines. Fee income growth momentum is continuing into the second quarter, and we expect these business lines to show strength for the full year. The quarter-over-quarter increase in interest rate contracts and other derivative income reflected a favorable change in the credit valuation adjustment due to the increase in benchmark long-term interest rates and an improved macroeconomic outlook. The decline in interest rate contracts revenue reflects the lower customer transaction volume and demand in the current environment. Moving on to Slide 19. First quarter noninterest expense was $191 million. Excluding amortization of tax credits and other investments and core deposit intangible amortization, adjusted noninterest expense was $165 million in the first quarter, a decrease of $0.6 million quarter-over-quarter. Reductions in overall operating expenses more than offset increased compensation and employee benefit expense, which is typically higher in the first quarter due to payroll taxes and other payroll-related expenses. Year-over-year, adjusted noninterest expense increased. The first quarter adjusted efficiency ratio was 38.7% compared with 39.8% in the fourth quarter. Over the past five quarters, our efficiency ratio has ranged from 38.4% to 40.8% despite operating headwinds from the COVID pandemic-related economic slowdown and near-zero interest rates. And with that, I will now review our updated full-year outlook for 2021 on Slide 20. For the full year of 2021 compared to our full-year 2020 results, we expect that year-over-year loan growth, excluding PPP, will be approximately 8%, narrowing to the upper end of our prior range of 6% to 8%. Year-over-year adjusted net interest income growth excluding PPP will be generally in line with loan growth on a full-year basis. In the current interest rate environment, we are focused on net interest income growth, which will be primarily driven by loan growth for our bank. Underpinning our interest income assumptions is the current forward interest rate curve. Adjusted noninterest expense growth, excluding tax credit investment amortization of 5% year-over-year narrowing to the upper end of our prior range of 3% to 5%. This change parallels the update of our loan growth outlook and largely reflects growth in compensation expense and higher computer software amortization expense as we amortize previously capitalized technology investments. Compensation expense will reflect loan production and revenue growth for the year. Our updated outlook for revenue expense translates to higher pretax pre provision income growth for 2021 compared to our prior expectations. I would add that we also expect to see stable to modestly improving operating leverage for the year compared to 2020. Based on our macroeconomic forecast and loan growth outlook, we do not expect to provision for loan credit losses for the full year. Finally, full-year 2021 effective tax rate of approximately 15%, including the impact of tax credit investments, unchanged from my prior outlook. There will be quarterly variability in the tax rate due to the timing of tax credit investments placed into service. With that, I'll now turn the call back to Dominic for closing remarks.

Dominic Ng, CEO

Thank you, Irene. In closing, we had a very good start to the year with attractive growth and profitability and look forward to delivering strong financial results for our shareholders in 2021. I will now open up the call to questions.

Operator, Operator

First question comes from Ebrahim Poonawala from Bank of America.

Ebrahim Poonawala, Analyst

I guess my first question is just around trying to figure out the potential for upside to your loan growth outlook, Dominic. If you could help us just across the three major buckets: one, on the residential mortgage side, is there any reason to believe that momentum slows? On C&I, what are the industries that you think will drive loan growth? And then on CRE, you sound a lot more constructive than you did in the last three to six months. So is the reopening or what you're hearing from clients making you feel better about CRE activity for the year?

Dominic Ng, CEO

Yes, the three buckets, residential, mortgages and home equity. In fact, I've been predicting it to slow down for the last four or five years, and I haven't succeeded. We've been having very strong momentum in the residential mortgages and home equity lines of business for actually quite a few years now. It's almost like we're getting tired of saying the same record every quarter. I think that, obviously, this lower interest rate helps, but for what we've seen so far, our momentum has continued to grow strong. And I look at even so far in April, it keeps going, and at this stage right now, I just don't see the residential mortgage sector coming down much, simply because we are getting good momentum both on refinance and home purchases, and our home equity lines are picking up really strong. So at this stage right now, I think that should be looking pretty good to continue on for a while. On the C&I side, I think the great news really is that we are getting new customers. We are continuing to receive really high-quality new customers. I think since the PPP back in April of 2020, we were successfully getting some very high-quality customers because of a bit more chaotic situation among some of the other banks, which has allowed us to demonstrate that our service levels are better. So from that standpoint, when we also look at our C&I side, it's growing from many different verticals and geographic regions. So it's pretty evenly distributed, and the commitments continue to grow. Of course, in the first quarter, we haven't seen much of a pick up from an outstanding balance point of view simply because we always have a slow first quarter; that's the nature of our C&I business. So we do expect that, particularly as highlighted by Irene's guidance in the third and fourth quarter, we will likely see more pickup, not only because the economy will open up more, but also because the nature of the business tends to have more drawdown in the third and fourth quarter. So that's all been going good. On the CRE side, I highlighted in my presentation earlier that the anticipated payoffs for the first quarter didn't happen as high as we expected. We do expect that maybe it could be happening in the second quarter. But all in all, I would say that we are seeing good momentum from our traditional core customers in the CRE sector. Many of our customers now are feeling more positive, and they see opportunities. They started even in the late third and fourth quarters of last year, and they continue to look for investment opportunities, which allows us the opportunity to see some decent growth in our CRE so far. So we are watching the progress. As of today, I would say that we are very comfortable with our guidance that we laid out so far.

Ebrahim Poonawala, Analyst

And just as a quick follow-up, in terms of the deposit growth, it was very strong this quarter. Do you have a breakdown of how much of the growth came from the US versus Hong Kong and Greater China, and do you see that as continuing?

Dominic Ng, CEO

Because as you know, our Hong Kong and China are just a very small part of our deposit total, so most of the deposits are coming from the United States.

Ebrahim Poonawala, Analyst

And do you see that as continuing?

Dominic Ng, CEO

Yes. When you look at this 40 plus percent annualized growth rate or 65% annualized growth for DDA, those are kind of things that we think it has a lot to do with the current economic environment. But I want to share is that I don't necessarily pay too much attention to the sort of like big deposit growth quarter-by-quarter that has been happening for the last couple of quarters. But I would say that I'm much more interested to look at whether we have high quality customers coming into the bank. Do we have high growth in the new customers that originated by our branches, by our commercial lending officers, and commercial bankers throughout the U.S. and China? And so far, that's been happening. In fact, our treasury management, cash management product team are working overtime, opening accounts and setting up all these online banking and digital banking requirements for our customers because we are getting more new customers. To me, that is very encouraging. We are hopeful that continued growth will sustain and that will allow us to have a much more meaningful core customer base going forward. This is above and beyond just the current environment because many banks also have high deposit balance growth for the last quarter. But that's what I'm really focusing on: how many new customers we have and what kind of customer are they? Are these customers core to have sustainability going forward? Those are the ones I'm paying attention to, and I feel pretty good right now that we will continue to see growth from this set of new customers together with existing customers who are expanding their relationship with us because our core capability from a product and technology perspective are getting better, allowing us to take on more complex deposit setups.

Operator, Operator

Our next question comes from Ken Zerbe with Morgan Stanley.

Ken Zerbe, Analyst

First, probably a pretty easy one, in terms of the provision expense guidance. I just want to make sure I understand it correctly, you said you're not going to book a provision expense for the full year. Are you saying that it is generally going to be zero for each of the next quarters, or could it potentially be meaningfully negative if you do end up releasing a significant amount of reserves?

Irene Oh, CFO

I don't have a crystal ball, honestly. With our guidance of zero as we project out and model out right now, the likelihood of having to add net provision is very low at this point in time. That's really what drove the change that we made to our guidance. The min/max of what might happen each quarter certainly could vary, and it is possible that we'll have a negative provision. But nonetheless, I'm very comfortable at this point in time with zero provision for the full year.

Ken Zerbe, Analyst

And then just a quick follow-up. In terms of the PPP amortization, with $34 million remaining, but you did $15 million this quarter, it seems that it could potentially fall pretty noticeably on a go-forward basis. Can you just remind us what your amortization schedule is of that $34 million? Is it straight line over five years, or is it more heavily weighted towards the front end?

Irene Oh, CFO

Yes, it's more heavily weighted towards the front end. I'll also add, we've had a fair amount of paydowns as well. In the first quarter, there was a period of time where we stopped doing the PPP loan forgiveness, but we're back up on that. In fact, last week, we started opening our portal for PPP forgiveness for PPP round two as well.

Operator, Operator

Our next question comes from Michael Young with Truist Securities.

Michael Young, Analyst

Just wanted to start with the NII guide and make sure I understand. So the increase in the loan growth to 8% would have a commensurate increase in the NII guide to 8% growth off the base number from last year?

Irene Oh, CFO

I don't know certainly if it's going to exactly correlate, but it will definitely be in line, Michael.

Michael Young, Analyst

Okay. And then my follow-up is just sort of on the additional liquidity build that keeps coming with the strong deposit growth. Do you have any updated thoughts about deploying that given kind of where rates have moved today and/or any additional analysis of sort of the stickiness of those deposits going forward?

Irene Oh, CFO

Yes, that’s a great question. In the first quarter, we took into account the rate changes and our comfort with the deposit growth we experienced and expect to see in the future. These factors influenced our decision to redeploy some of the cash we had accumulated into securities and repos. We also considered the asset sensitivity of our balance sheet while ensuring we didn’t extend duration too much with the securities and repos we purchased. We are primarily acquiring treasuries and GSE step-ups, which allow us to earn a bit more on our cash today without extending duration excessively in the current environment. Looking ahead, we will continue to assess our liquidity and deposit growth throughout the year.

Operator, Operator

Our next question comes from Brock Vandervliet from UBS. Please go ahead.

Brock Vandervliet, Analyst

If you could just kind of review kind of the puts and takes on the noninterest income in the FX, derivatives, service charges, we've been expecting those to kind of come in fairly materially off a very strong Q4, and they actually hit higher. What should we be looking for in the balance of the year or the next quarter?

Irene Oh, CFO

Yes. If you look at the company data that we have on Page 18, I think we do a nice job of breaking out the fee income from a customer transaction perspective, reconciling back to the gas. If you look at each line item, foreign FX income, we have seen a lot more kind of transaction volume and a number of clients. So in the prepared remarks, we talked about how that we expect that to continue the momentum, particularly on a year-over-year basis. So far in the second quarter, we're doing pretty well as well. On the wealth management side, same thing. At various points in 2020 with the pandemic, there wasn't a lot of customer activity. We saw more interest. We've also kind of expanded and have some great product offerings for our customers that they like, and that has certainly helped as well. I would say also, with the strong deposit growth that Dominic spoke about, and we talked about in the prepared remarks, the GTS-related deposit account base continues to grow, and we expect that to continue to grow over the course of the year as well. So really, with the IRC contract, the customer revenue-related revenue given the kind of the rate environment, that's probably the category where I don't see this kind of level of growth for the full year, but other areas, we're very positive year-over-year.

Dominic Ng, CEO

I just wanted to emphasize that when examining noninterest income, including foreign exchange, global treasury services, cash management, and consumer branch fees within wealth management, it's clear that these are all types of fee income linked to our customers. We are acquiring new customers thanks to the outstanding dedicated service provided by our associates in the U.S. and China. More importantly, due to our investments in digital banking, foreign exchange, cash management, and other areas, we now have the capability to introduce additional products that facilitate the generation of these extra fees. Without these technological advancements, we wouldn't be able to create these fees, even if we had the customers previously. In the past, some customers could not transact everything with East West due to our lack of technical capability. However, over the past few years, we have been gradually enhancing that capability, and we are now witnessing the positive results in our noninterest income. I anticipate that this growth will continue, which is why it is crucial for us to keep investing.

Irene Oh, CFO

I'll also add, last year, including largely in lending fees, we had more income of about $11 million, which we don't expect to occur. So aside from that, we do expect good growth in the income.

Operator, Operator

Our next question comes from Dave Rochester from Compass Point. Please go ahead.

Dave Rochester, Analyst

I was wondering if you could talk about where new loan yields are today across your major loan buckets as well as new securities yields, just given the steeper curve? And then would be good to hear where the overall average yield was on those securities purchases in 1Q.

Irene Oh, CFO

Yes. Hold one minute, let me get that for you. My computer locked up. So I've got it, just give me one minute.

Dave Rochester, Analyst

No problem.

Irene Oh, CFO

All right. In the excitement of my computer locking up, I didn't hear the last part of your question. Would you mind repeating that?

Dave Rochester, Analyst

Oh, sure. Just where the securities purchases were this quarter in terms of just the overall yield?

Irene Oh, CFO

Yes. That I don't need to look up. The securities that we purchased generally are about 150, 160 basis points, so lower than kind of the yield that we had before. But as I said earlier, we wanted to just make sure from a duration perspective, we are comfortable. And then give me one minute here. If you look at kind of the loan yields, currently, new quarter loan yields, generally for C&I, the loans are about kind of 4%, probably including fees. For commercial real estate, we're at probably prime flat. Consumer loans in total were about 3.75.

Dave Rochester, Analyst

Great. And then for resi still north of 4?

Irene Oh, CFO

The 3.75 was combined from HELOC and single-family.

Dave Rochester, Analyst

Got you. Okay. So the resi piece is now, I guess, maybe a little bit below 4? Then it combines.

Irene Oh, CFO

That's right. And the blended perspective with the ARM portfolios as well. And the securities yield is about 160 basis points.

Dave Rochester, Analyst

Okay. Great. And then you guys have plenty of capital today. You still have that buyback outstanding. I was just wondering what could prompt you to take a closer look at that buyback as we go through the year if you have any specific capital targets you're looking at? Just any color there would be great.

Dominic Ng, CEO

Having pretty decent growth so far. This whole idea about having a little bit more capital than our peers is that well, during the pandemic, particularly at the beginning when everybody panicked, we didn't have to panic as much because we had plenty of capital. Now I think when the economy starts rebounding, we have very nice growth. As you can see, our huge deposit and even loan growth is pretty strong. So we look at it as it's nice to have that kind of capital for stronger growth. At this stage right now, I think that we're going to stay put and see how it goes. Keep in mind, though, even with our capital today, as I just shared, we have a return on equity and tangible equity of 17.2%, which is not bad. That's the way we see it. When we can pull in this kind of return, we don't need to spend too much time managing the capital too tight.

Operator, Operator

Our next question comes from Elan Zanger with Jefferies. Please go ahead.

Elan Zanger, Analyst

Just wanted to touch on credit. I was a little surprised to see the oil and gas if you actually go up despite the better backdrop. Did see a little bit of migration. Could you maybe talk to the outlook in that book and the reserve for that kind of going forward for this year?

Irene Oh, CFO

Yes, great question. The reserve calculation did increase a little bit. Part of it is correlated to a little bit adverse migration into substandard and also specific reserves that we have for some of the non-accrual loans. If you look at 3/31, the total reserve that we had for the oil and gas portfolio was $113 million for the outstanding loans compared to $111 million as of December 31. Overall, I would say that we're continuing to work through the portfolio. Generally, the outlook is more positive, but certainly, we want to be prudent and kind of conservative with our reserving there.

Elan Zanger, Analyst

Okay. And I think you touched on the China theme earlier, but just could we maybe get a pulse on the outlook for cross-border activity maybe for the second half of this year?

Dominic Ng, CEO

The cross-border activity is progressing very well. We're seeing a resurgence facilitated by both individuals and technology. We've observed that while most deposit growth is originating from the U.S. and loan growth primarily from the U.S. as well, a significant portion of those deposits includes a cross-border component. Many of our loans also reflect this cross-border aspect, as numerous customers conduct business in the U.S. but have ownership connections in China or Hong Kong. We're increasingly servicing clients who need loans and commercial deposit setups in the U.S., while also maintaining business ties in China and Hong Kong, leading to additional commercial banking relationships with us. These clients often secure lateral credit to strengthen their credit position in the U.S. We take pride in our capability to manage these cross-border transactions around the clock across various time zones. Our compliance and regulatory expertise enables us to navigate the different rules and regulations in each region effectively. We anticipate continued success in our role as a bridge between the East and West, and we are eager for the opportunities that lie ahead in the coming years.

Operator, Operator

Our next question comes from Jared Shaw with Wells Fargo. Please go ahead.

Jared Shaw, Analyst

Looking at credit and losses with the 15 basis points this quarter, do you think that we've turned the corner on lost content? Should we be looking at this as sort of the high watermark for expectations given the broader economic backdrop, or could we see more episodic losses as we go through the year?

Dominic Ng, CEO

I think that from our perspective, what we're most comfortable with is really looking at our entire loan portfolio overall. Our criticized loans have been stable, and we also continue to review our loan portfolio one sector at a time. We recently just had another CRE loan review, and then we look at these different industry verticals from C&I and so forth. Based on our review, we feel pretty confident that our loan portfolio overall has good credit quality. In terms of any kind of major concern that it might get worse, at this stage right now, I would say it's not very likely. There's always going to be occasional 1 or 2 loans that we ended up charging off. In terms of overall, do we have enough reserve for our loan portfolio, I would say that we are very confident that we have plenty of reserves and allowances to cover any potential losses in the future.

Operator, Operator

Our next question comes from Chris McGratty with KBW. Please go ahead.

Chris McGratty, Analyst

Just a quick housekeeping on the tax rate and the AM expense. Any color on the cadence for the rest of the year? I think $100 million was kind of the thought on the expense previously.

Irene Oh, CFO

Yes, we've discussed this before. Depending on the timing of the investment, there may be some fluctuations. Currently, with the effective tax rate we are projecting, it includes $130 million in credits for the entire year and $115 million related to amortization for the full year.

Operator, Operator

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

Matthew Clark, Analyst

First question, just on the core NII guide. It looks like in order to get to that 8%, you need assets to grow faster than loans. Just wondering if that phenomenon could put some additional pressure on your core NIM? Or do you think going from cash into securities can help mitigate that? Just trying to get a sense for whether or not we've troughed in the core NIM.

Irene Oh, CFO

Yes. I think that's a great question. We do think that the NII growth will correlate with the loan growth. And then, as you pointed out, with the kind of redeployment of some of that excess cash into securities, that will help from an NII perspective and also in NIM. I'll also point out that our continued kind of repricing on the funding side, the deposits, the flood also helps as well. At this point in time, although it's hard to predict exactly where that NIM is going to fall out based largely on deposits and excess liquidity, we're comfortable that our margin will stabilize and could even modestly increase.

Matthew Clark, Analyst

Okay. And then last one for me. Just on Slide 16 of the deck. Your C&I average loan yield of 3.36 this quarter, excluding PPP, I guess given your growth prospects, how do you feel comfortable pricing at that level? How do you ensure that you're getting paid for the risk you're taking?

Irene Oh, CFO

Yes. I think with rates being so low, that's a question that we have to address every day. We talk about it with our RMs, our team leaders, and the credit team every day. I think that's not just C&I. It's also CRE as well for us. As you know, single-family and HELOC, the credit quality is so extraordinary, and I'm not concerned there. From a product offering perspective, we also have a unique product. So for C&I and CRE, honestly, I think we're being very careful to ensure from an overall return perspective, from a credit quality perspective, we are being cautious with that. And that is reflected in the growth numbers we are expecting.

Operator, Operator

Our next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner, Analyst

I've got questions. First, in terms of the C&I growth, and just kind of the general taking temperature of that customer base. Can you comment on what degree growth is coming from the specialty verticals and if any of those specialty verticals that are getting particularly more active?

Dominic Ng, CEO

We've been fortunate. I think since the latter part of the third quarter of last year, we're really seeing a positive momentum from just about every single vertical. So every month, there's another team that comes out stronger than the other one. It's a nice little internal competition, which is really healthy. But if I look at it in the first quarter from a loan outstanding point of view, I would say that the fields that stood out for the first quarter for C&I loan outstanding growth will be mainly entertainment, healthcare, technology, and a little bit of cross-border business. In terms of commitment, some of them have done well in terms of booking commitment without being able to get much funding. For example, private equity capital call lines get some nice commitments; they just haven't been able to get that funded. Over time, you would think that some of these private equity funds that raise money would start investing. So I would expect that different quarters will have a different mix. As of today, I'm pretty comfortable that different sectors are going to be doing quite well. Other than in oil and gas, we decided to really just slow down and continue to have balances come down to less than $1 billion. That's what we've been working on, and it's been working so far.

Gary Tenner, Analyst

And then in terms of the provision guide, kind of a follow-up question there. If you assume 8% growth excluding PPP and kind of a 0 provision over the course of the year, that seems to get you pretty close to the day 1 CECL allowance plus or minus 1 30 to 1 40. Have there been any changes that could maybe longer-term drive that allowance below the CECL day 1? Or is that kind of the glide path to more of a base level?

Irene Oh, CFO

Yes. My math works out the same as yours. Certainly, depending on what happens largely in the forecast, I think it could drive lower. If we look at it as of 3/31 versus day 1 CECL, near term, unemployment drivers are certainly higher today, but when we look at the forecast over multiple years, it looks to be better. GDP growth over the next couple of years also looks to be better. So there are other drivers that, especially if they improve, could drive that lower, but that is certainly something we're looking at very carefully.

Operator, Operator

Our next question comes from David Chiaverini with Wedbush Securities. Please go ahead.

David Chiaverini, Analyst

My first question is kind of a combo question between expenses and loans. So expenses were down in the quarter, but the guide was raised to the upper end of the range to 5% from 3% to 5%. You mentioned that it's driven by growth in compensation related to loan production and computer software expense. I guess the question is, are you hiring on the loan team side of things? Or is the loan growth that you're expecting more a function of increased commitments and pipelines from the existing teams?

Dominic Ng, CEO

We have hired additional people. I wouldn't say that we have made significant hiring. I think that the vast majority of our growth is coming from our existing team.

Irene Oh, CFO

I'll just add that part of that commentary is really focused on the point that when we look at it, payroll is up. Also when we look at kind of the revenue from and expectations for growth on the lending side, the fee income side, we are also increasing our bonus pool that we've set aside, given that our expectations are revenue and net income will be up considerably year-over-year. Year-over-year increase for the first quarter this quarter to last year is about 3%. That should give you some perspective around that.

Dominic Ng, CEO

Last year was not a normal year. Last year had been relatively normal, I would think that the incremental increase would not be as much at all, simply because last year we reduced expenses quite a bit. So everything is relative.

David Chiaverini, Analyst

And then shifting gears to the deposit growth really nice this quarter, and you mentioned about the digital banking platform and the success you're having with treasury management and small business customers. I was wondering, can you break out the split between commercial and consumer in terms of driving that deposit growth? Was one weighted more than the other during the quarter?

Dominic Ng, CEO

Do we have that number?

Irene Oh, CFO

I don't have the specific breakout, but it's definitely more weighted towards commercial. I would note, even for our retail branches, growth on consumer and commercial have both been very nice.

Dominic Ng, CEO

Yes. Strong on both sides. It's just that probably a little more.

Operator, Operator

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

Dominic Ng, CEO

Thank you. Again, thank you so much for joining us on our call today. I'm looking forward to speaking to all of you in July for our second quarter earnings release. Thank you. Bye.

Operator, Operator

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