Q2 2021 East West Bancorp Inc Earnings Call
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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 should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask any question. You May Press Star then 1 on your touch tone.
For them and to withdraw your question. Please press Star then 2 we ask that you. Please limit yourself to 2 questions. Please note. This event is being recorded I would now like to turn the conference over to MS. Julianna bullish got director of Investor Relations. Please go ahead ma'am.
Thank you Jack 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 Inc. 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.
They 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 of 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 comps.
The operating results. Please refer to our filings of the Securities 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 the slide deck that is available as part of the webcast on the Investor Relations site as the.
The remainder of today's call is being recorded and will also be available on replay format on our Investor Relations website, I will now turn the call over to Dominic.
Thank you of Julianna good morning, and.
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.
Presentation.
This morning, we reported.
Second quarter of 2021 net income of 225 million of dollar 57 cents 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.
And improving asset quality.
Yeah.
Perhaps you're muted.
Okay.
Hello.
In the second quarter, we earn of $283 million in pretax pre provision income on total revenue of $445 million.
Our pretax pre provision income grew by 8% linked quarter on.
The 33% annualized and we expect it to continue to grow in the second half of the year.
Quarter over quarter on a pretax pre provision profitability expanded by 6 basis point to 2% of average assets.
Reflecting east West attractive core earnings power.
Asset quality has remained healthy with improvements in every metric.
Because of this.
And the more constructive macroeconomic forecast.
We recorded a negative $15 million provision.
Our credit losses in the second quarter compared with a zero provision in the first quarter.
And so we return on attractive 1.56% on average asset.
16, 6%.
On average equity.
And 18, 3% on average tangible equity for the second quarter of 2021.
Fly for presents a summary of our balance sheet.
As of June 32021.
Total loans reached a record of $40.1 billion, including $1.4 billion of Paycheck protection program of loans.
Excluding P P P.
Total loans grew by 12% annualized from March 31, 2021.
Second quarter production was distributed across the residential mortgage C&I and commercial real estate.
Year to date for the first half of 2021.
Loans, excluding PPP.
10% annualized.
Based on the current pipeline of expectations, we increased our full year outlook for loan growth to a range of.
9% to 10%.
From a percentage of students.
As you can see on this slide our portfolio is somewhat equally weighted between the 3 major loan types.
This differentiation east West for many other regional banks.
We also benefit from a geographic footprint with locations in dynamic metropolitan areas.
We believe that this diversification.
Is the strength.
The provides multiple engines of growth and reduces credit concentration risks.
We are positive about the trajectory of loan growth of.
Across our business lines of <unk>.
Retail branch network is an excellent source of new consumer and commercial banking relationships.
We continue to see high origination volumes for.
The single family mortgages and home equity lines of credit.
Which we primarily originate through our branches.
First of all.
Through our retail branches. We are also growing small business C&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&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 32021, total deposits reached a record of $52.6 billion up $3 billion or 25% annualized for March 31st.
Non interest bearing deposit grew true core 9 billion or 61% annualized to a record $21.8 billion as of quarter bad.
Making up 41% of total deposits.
Up from 38% a quarter ago and up from 34, 34% a year ago.
Similar to loans, our deposit growth was also well diversified across our consumer small business for us.
And cross borders 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 32021, with a common equity tier 1 ratio of 12, 8% on a total capital ratio of 14, 3%, which provides us with meaningful capacity for future growth.
East West Board of Directors has declared third quarter 2021 dividends for the company's common stock.
The common stock cash dividend of 33 centers payable on August 16.
2021 to stockholders of record on August 7.2021.
Moving onto a discussion of our loan portfolio beginning with slide 6.
C&I loans outstanding excluding PPP were $12.4 billion as of June 32021, an increase of 12% annualized from March 31st.
Total C&I commitments was $17.7 billion.
As of June 30.
Sequential increase of 10% annualized on an average basis.
On islands, excluding PPP grew by 6% annualized in the second quarter.
Growth was well diversified by industry.
And reflected good performance across our footprint and teams.
I would highlight general C&I production in California.
As well as contribution from our China.
And New York based teams.
By industry I would highlight 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 $15.4 billion as of June 32021 up by 8% annualized.
For March 31.
From the past several quarters, our origination volume, especially from the 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 9 and 10, we provide details.
Regarding our residential mortgage portfolio.
During the second quarter.
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 has slowed as the market changes good.
<unk> momentum is continuing into the second half of the year.
Residential mortgage loans with $10.7 billion as of June 32021.
Growing by 18% annualized for March 31st.
I would now.
Turn the call over to Irene for a more detailed discussion of our asset quality.
And income statement IV.
Thank you Dominic I'll start with asset quality metrics on slide 11 overall, we're very pleased that all of our key asset quality metrics improved quarter over quarter total criticized loans were down by 15% to 1 billion as of June 30th 2021 of coupons 6 percentage of total loans, we saw improvement across.
All significant loan portfolios.
Nonperforming assets were down by 13% to 226 million for 38 basis points of total assets as of June 30th.
The broad based improvement in asset quality included our oil and gas portfolio of better operating environment for the sector drove several upgrades.
This along with workout payoffs and pay downs reduced oil and gas criticized loans for 26% of non accrual loans to 70% of the portfolio. Accordingly, We released 34 million of loan loss reserves allowance coverage of oil and gas loans was 9.8% as of June 30th compared with 11.6 per.
As of March 31st on Slide 12, we present the components of our allowance for loan losses, our allowance total 586 million as of June 30th of 1.52% of loans. Excluding P. P. P compared with 608 million on 162 as of March 31st and compared what the 139 on.
Day, 1 post diesel net charge offs decrease of $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 on improvement of 1 basis point from 14 basis points of annualized in the first quarter.
During the second quarter, we reported a negative 15 million provision for credit losses, compared with zero provision in the first quarter. Currently we do not expect to of course, the 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. The couple of noncash items. The noninterest income although investment income increased by 7 million sequentially, reflecting higher valuations of.
Cri S. The IC investments during the quarter included an interest rate contracts and other derivatives are mark to market adjustments, which were on 5 million loss in the second quarter compared with the 14 million gain in the first quarter. These primarily relate to changes and the credit valuation adjustment.
In the second quarter income tax expense was 46 million and the effective tax rate was 17% the year to date effective tax rate for the first half of 2020, 1 was 15% and we expect that the full year effective tax rate will also be 15%.
I will now review of the key drivers of our on 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 of 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 for residential mortgage.
Second quarter average deposits of $50.2 billion were up by $2.3 billion of 20% linked quarter annualized aside from time deposits. All other deposit categories increase led by noninterest bearing demand deposits at a rate of 36% annualized as a result of average loan to deposit ratio was 79.
The percentage of the second quarter down from 81% in the first quarter.
Average, earning asset growth on the second quarter reflected the strong deposit growth year to date on 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 redeployed some of our etcetera.
Liquidity overall, the mix of average, earning assets with higher yielding in the second quarter.
During the second quarter of 400 million of S. H L. B funding, which came into the effective interest rate of 225 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.
In the second quarter, an increase of 4 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 of 2021, we had $26 million of P. P. P deferred loan fees were mainly.
To accrete into income.
As you can see on the waterfall chart on this slide the 4 basis point quarter over quarter increase in the net interest margin breaks down as follows.
Just 3 basis points, each from a lower cost of interest bearing deposits and from the deployment of excess liquidity, partially offset by -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 the net interest margin.
The lower yield and the deployment of excess liquidity expanded the net interest margin in the quarter.
Our updated outlook, we expect the full year net interest income excluding P. P. P 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 in repo asset purchases. In addition to net interest income.
Expansion driven by lump out.
Turning to slide 16, the second quarter average loan yield was 357 and excluding the impact of PPP the adjust.
The adjusted loan yield was 358 down slightly by 2 basis points on 361 of the first quarter.
Turning to slide 17, our average cost of deposits for the second quarter dropped to 14 basis points on improvement of 4 basis points from the first quarter. The spot rate of total deposits as of June 30th, let's 13 basis points down by 3 basis points for March.
31.
The cost of deposits declined as the 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 at the maturing Cds reprice over the second half of 'twenty 'twenty 1 although the impact of this will diminish after that the.
The average cost of the Cds in the second quarter was 40 basis point of drop of 10 basis points from the first quarter and the second quarter, we originated or renewed for 5 billion of domestic Cds at a blended rate of 19 basis points and on weighted average duration of 4 months, we had 7.9.
On good 27 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 the slide 13.
Second quarter of fee income and net gains on sales of loans were $63 million up by 8 million of 15% from the first quarter.
Higher transaction volume of new customer acquisition growth healthy increases in customer driven and 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 of show strength for the full year corridor of recorder interest rate <unk>.
<unk> 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 of decrease of $3 million or 2%.
Sequentially.
This reflects careful expense management and of quarter over quarter decrease in compensation and employee benefits from the seasonally high first quarter year over year adjusted noninterest expense increased by 5%.
The second quarter adjusted efficiency ratio was 36, 3% compared with 38, 7% in the first quarter importantly, we achieve our efficiency ratio not just through expense management, but through increased revenue reinforcing our revenue growth is our continuous investments in people on technology to <unk>.
Spanned 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 of purchases, which we expect will lift the 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% Inc.
Putting 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 second quarter and expect that to continue.
For the rest of the year, but the hard work and excellent execution by all of our associates drive our results and is a true Testament of the culture of East West.
I would now open up the call to questions operator.
Thank you we will now begin the question and answer session to ask a question you May Press Star then 1 on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw. Your question. Please press Star then 2 please limit yourself to 2 questions and at this time, we will pause momentarily to assemble our roster.
Yeah.
Okay.
Yeah.
And the first question will come from Abraham Poon of Wala with Bank of America. Please go ahead.
Good morning.
Good morning, I guess.
Just first question maybe for Ian for you around cash management.
You've been.
Buying into the first portfolio as well of the repos.
Give us a sense of how youre 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 of you think about.
Eventually short rates going higher.
Yes, great question Abraham.
Certainly I think our view from what we the actions that we took on the first quarter have shifted a little bit with the long term rates coming down. So although do 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 then the actions that you saw we took in the first quarter. When the tenure of it was higher and we redeployed about $2 billion into a longer duration securities of repos. The repos that are variable rate I think that's more attractive for us of the current environment and the security that we're buying right now probably about you know of largely and the S. A.
The CMO as you know about 1.5 kind of rate.
Got it.
Separate question Dominic for you mean non growth seems to be very strong deposit growth today is strong.
Give us a sense now that you had like 6 to 9 months end of the bite and administration the.
Headlines around the U S. China suggests a lot of tension how is that impacting your growth outlook, how youre going about growing the bank because that's something that consistently keeps coming up from an investor standpoint, when the thing to 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.
I think that that has a lot to do it well.
<unk>.
The political rhetoric out there.
It's always going to be there because that seems to be something that the gain.
Kind of lot of traction the mom politicians and so forth, but if you look at the business.
There is still obviously a lot of business going on between the us in China.
Now the headline news about some of the large investment may not be coming.
But you have to.
On the sand from the East West Bank perspective, we are mainly focusing on the noodles mid size business and they're not the the high profile of business and then they're not the highly sensitive kind of business like taking a like a.
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 for years under the Trump administration. There are a lot of the not only just recoveries, but also.
On the enforcement of tariffs.
Yeah.
Our clients navigate through it wasn't easy.
On East West Bank navigated through and in fact every single year, we had growth for the last for 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 U S. China space and this is something that we're really good at if I look at <unk>.
Just the last 2 quarters, we have.
Very diversified growth.
In our China operation and we are very diversified growth.
From a cross border business and the spread from.
Clean energy.
The general manufacturing wholesale.
Consumer goods.
The 2 private equity et cetera, so we have of poorly.
Our broad base of growth opportunity I think 1 of the things I really want to highlight is that the reason the after growth is not that unlike the multinational.
The.
Companies, all the money center banks, who actually for the last 6 months of so it has been stepping up and investing in China you heard the news about J P. Morgan Morgan Stanley Goldman Sachs are they're all stepping up and investing more in China.
The standard charter of the Hs.
HSBC theyre 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 power of.
Strategy of being the bridge between the east and West and the Southern Cross border business and but what we have done. This for the last few years, we've talked about it in the quarterly earnings release often.
That is that we continue to make the investment.
In technology.
In the.
Cash management product capability ethics capability et cetera, the who.
Whole idea is that we built a platform we build product capability the fit the customer needs. During 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 are providing the product.
<unk> to support them for.
4 of 5 years ago.
It was half aspiration.
Oh 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. So we have these record thing.
The income in this quarter.
And the deposits nice deposit growth EBITDA, and so forth and together with loans is no surprise, because we have built up the capability to allow us to expand.
Not only with new customer relationships.
But also.
All of getting a larger wallet share.
For many of our existing customers, who maybe 4 years ago will enable to do certain type of like foreign exchange or maybe certain type of cash management.
The relationship with us because the.
The little bit of lack of capability in the past that we were able to correct that so all of our digital offering and our online offering a much stronger and we will continue to build that and in the next few years with continued to focus on building that capability because the market opportunities.
Is enormous for east West Bank that have the strong expertise.
<unk> continued 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, the resi mortgage has just been such an amazing of driver of that growth, but when we think when you look out for the second half of the year maybe into 2022.
This growth continue to be the main driver or do you think the C&I could actually start picking up a fair bit from here.
I've been predicting the demise of single family mortgages for the last for 5 years and I was wrong every single year so somehow.
Every 2 quarter I started talking internally with our team and saying I'm not sure that the singles day.
Single family mortgages origination.
On sustaining this level.
And so my mortgage department continue to.
Pleasantly surprise to me because I thought fourth quarter last year was debt all time high there is no way that we can have a beat that and then first quarter of just beat that and then Dan I thought it will be over and then second quarter come in and then become record performance again now at some point.
Being prudent I would expect at some point it was 5 but then I would say that looking at the pipeline today and looking at the origination.
Origination.
<unk> seems to be going at 1 would what would we slow down.
I don't know yet, but in the meantime, we're very confident with our C&I growth.
Our CRE growth I mean the hour.
Our approach has always been a week.
We are going to try to do it.
In a very balanced approach.
This whole pie chart that we share.
That we have of somewhat equally distributed.
Type of hub.
Balance sheet and Samsung.
On what equal weight of.
C&I.
And single family and so if 1.
Particular.
Area, the 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 on maybe where the economy stopped picking up even more and east west continue to so far we've been able to for the last.
12, 24 months would be continuing getting new C&I customers.
And.
It just is.
As a matter of math, because we got so many new C&I customers at some point the balance will grow and so I expect that the C&I will continue to grow and hopefully at the time debt single family start slowing down a little bit.
The C&I will step up a little bit more so that's what we see at this point, but so far things look pretty good.
Okay, Great and then my second question on really quick maybe 1 for Irene.
I guess when you guys. Originally said you do not expect the provision expense for this year.
I originally thought you meant zero, but obviously it came in well below that is it fair to assume the eighth here is it fair to expect a negative provision expense for the back half of the year.
Can my original expectation was that it would be zero, along with your expectation of an interpretation of <unk>.
Guidance, Yeah, I think at this point get in.
Our portfolio given the trajectory we're comfortable with it.
Zero provision.
For.
For the second half of the year, depending on the economic outlook largely for the different model that we run driven by the unemployment rate and the to tag on treasuries Bad GDP growth I think it's within the realm of possibility. It could go negative, but certainly I think from our perspective.
Back then we want to be cautious.
With the provision on the negative provision so I'm comfortable with the zero provision for the second half of the year.
The next question will come from Jared Shaw with Wells Fargo Securities. Please go ahead.
Hey, good morning.
Good morning.
Yeah, I guess my first question more on on.
Liquidity and you know 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 sheet.
How should we think about future loan growth of about potentially be offset by potential deposit outflows with the loan to deposit ratio of normalizing.
Jared what a lot of of the new growth that we've had and the bounds of 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 rate.
<unk> are pretty flattish.
And overall when we look at the financials of our C&I customers. We agree right people have a lot of cash they have a lot of liquidity and that's 1 of the reasons of utilization rates on increasing but the.
The balance increases are really from new customer acquisitions. The hope that helps clarify your question.
Yeah, Yeah, but I guess.
Okay Yeah.
The good and then on the on the fee income side, you know great growth on on fee income and and good guidance there.
Is that a are you seeing the E C.
Sort of pent up demand coming out now that things are starting to release or is this just more of a of good return to normal and we should see a steady March higher from here is volume and capacity continues to increase.
Well I I am pretty sure that some of them it yourself.
A bit of a rebound from.
2020.
In terms of when there are more of vaccination and then the economy of opening up a little bit.
There's 2 of certain degrees of ours that but I think for again going back on the east West Bank perspective.
We have.
<unk> brought in.
A lot more new customers.
And also as I shared earlier from the cross border banking perspective.
We have actually not just cross border banking actually many of our more sophisticated.
Larger sized clients.
On signing up with our cash management services that may be 2 or 3 years ago. Soon type of deposit was 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.
Giving us the larger wallet share and that drives.
These additional fee income.
In the Treasury management services, and then of course on the foreign exchange because if there's so much more on cross border both on the consumer and commercial side.
In addition to that in terms of wealth management again, that's the sheer bringing in more customers.
Because that really isn't.
Related to.
The more sophisticated platform and so forth it just bringing more customers and so we expect of that will.
We will continue to.
Execute.
And the strategic direction.
And our focus of continuing to be.
Diverse diversified portfolio of client base to allow us to not have to over rely on any concentrated growth.
Risk and that's the that's the game plan.
Yeah.
The next question will come from Brock Vandervliet with UBS. Please go ahead.
Hi, guys. This is out of USA.
Abraham for.
For Brock.
Just maybe starting off on the C&I growth again, so obviously very good it sounds like the customer acquisition of the driver which is great.
On your pricing was also pretty stable quarter over quarter.
You had to make any trade offs on pricing or structure to keep some of this momentum going that you've seen.
We have you know the against going back to a very diverse diversified.
The group in the us from industry perspective from geographic perspective, there are always some type of a business that.
Like.
All of the community banks or maybe at the regional banks are all heavily engaged in the in force those business no. There are some competitive pressure there are others like some of our cross border business that we hardly have any competition that we do not have as much pressure so but all in all I think having a diversified portfolio of <unk>.
C&I.
Loans and was many different sectors allow us to somewhat blended 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 will we have very unique.
Value propositions in some of the sectors that allow us to get the kind of like a pricing.
At the.
Make it worked out so that's why you see that there is a staple type of non U.
Yeah.
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.
Thank you.
Well on Texas team.
Doing well doing very well.
In fact.
Oh.
Obviously, you know, we would take that oil and gas aside because thats, where we are trying to make sure that we hold at below a $1 billion and that's so far going well, obviously the AR.
The all the asset quality metrics improved much better, but we put that on the Si the C&I and CRE in Texas are growing as a quick 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.
The first question just around loan pricing and given what the curve has done of late have you seen any any change.
In terms of the competition.
On new business here more recently.
Okay.
Oh, there are always competition.
In particular the C. R E that.
Sort of like.
Keep going down in terms of pricing and so frankly, we could've done a lot more if we're willing to just.
Going down the same path I think the opposition is that.
By and large.
Our focus on series of work with our longtime 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 may be slightly better.
And then the downward.
The spiral that are taking about thats going on amount of some of these other smaller community banks and that's something that we we just don't think that is necessary for us to.
Go down that path and I think debt.
Because many of those are the banks.
So sort of like based on the yield curve and the walk the price down and I think eventually when they did the interest rate environment change. It can it can hurt them in the long run. So we are looking at both short term and long term, so and just do thing.
In the east West way.
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.
Is that growth coming from within your markets.
Yeah, that's all that's really coming largely from southern California, and then also to the Dominic's points earlier also our Texas team as well.
But no change in our strategy of the 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 the deposit growth that has been fantastic here I remember on the first quarter. You said that was going to slow in Q2, and I guess technically you 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 the.
Slow, but still remained strong.
And then if I heard you correctly it sounds like Youre, assuming slower securities growth in your NII guidance. 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.
Yeah great.
Great questions, Dave you know our deposit growth. There's no question with the kind of the investments that we've made the product offering the space that we're in cross border of customers were acquiring new customers with that sat and we see that you know more strongly with the transaction volume the product utilization and.
On just the fee income from that but with that said there's no question the.
The the kind of macro environment and the other drivers are contributing to excess kind of liquidity that some of our clients have you know I think what we're really pleased with as far as the deposit growth from consumer and small business and our retail branches corporate.
The commercial deposits, they're all growing nicely and the fee income in the core operating accounts are growing so.
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 a day at this point in time, especially where the yield card is.
<unk>.
Kind of a cautious approach as far as redeploying some of that longer into securities will still continue to do that as I mentioned, but maybe not at that same pace that we did in the first quarter.
Yep, Okay, and then on the rate side, you're assuming the current curve persists or current kind of crowd there.
That's correct and then.
I appreciate that and then maybe just my second question of you just quantify the growth you guys saw on loans and deposits and the Hong Kong and China.
<unk> that'd be great. Thanks.
Growth in loans in Hong Kong.
And China was pretty good this quarter about 150 million or so on the deposits side, a little bit of of increase but not as much.
And then probably about a 1 point on <unk>.
He has made a 2.8 billion in Hong Kong and China combined.
The next question will come from Elon Zenker with Jefferies. Please go ahead.
Thanks, Hi, good morning, everyone.
Just back on on the loan growth I just wanted to check in on the CRE pay downs I. Thank you.
You were expecting some elevated pay downs, possibly in the second quarter.
The dose 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.
Wood.
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 no client.
Intention may not necessarily always worked out.
Okay.
And to get to the 5% expense guide.
And assumes a decent uptick in cost in the second half I guess, what's driving those cost higher and does and does this kind of bake in some.
Some sort of pick up in the travel related costs.
Yeah, we have in our kind of forecast assumed a little bit more travel related cost it's already happening.
<unk>.
Certainly not to kind of a normalized level, but I'll just kind of maybe remind you of like for the first half year over year compared to last year you were at that 5%. So it's really kind of steady from where we're at right now on most of the cost increases that we have are related to compensation.
<unk> employees, new employees that we've hired.
Making more money so bonus accruals are higher the investments that we've 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 are also giving more money for charity too.
We're doing doing well, we need to get back to the community.
The next question will come from Brandon King with the Truest. Please go ahead.
Good morning.
The monitor with the 1.
Yes, so with the implied and improved operating leverage on the updated guidance.
There'd be any plans to pull forward any planned investments.
What do you mean by plant plant investment can you maybe help help us define the look yes, so I mean for the ongoing investments in the business but.
With the operating leverage improving.
Could you potentially poole for any investments of let's say and makes you or using the advantage that you were planning on ongoing.
No. We just you know we continue to execute according to our our strategic business plan and what form the let's say technology investment standpoint of people investment standpoint, we continue to just.
Trying to do it in the orderly fashion.
Not necessarily that you know trying to of summary, based on any particular specifics of.
The situation.
But of course, if there are some of them.
Greg opportunity out there that the available we are always you know.
<unk> open flexible and then somewhat entrepreneur to take advantage of it but.
Outside of any of that I think we just.
Follow on our strategy plan and execute accordingly.
Okay.
And I saw the $400 million in FHA Ob advances were paid off in the quarter.
1 of $250 million.
The remaining.
When does that mature and are you planning to pay that off.
And the Thompson.
And of the rest of the slot on the chairs at various points next year.
We expect to pay that off at that point of time.
$175 million end of February of next year and another 75 in November.
The next question will come from Chris Mcgratty with K B W. Please go ahead.
Great Good morning.
Good morning, maybe you're more hey, good morning, maybe of a longer term question on credit quality.
Obviously, the result of been fantastic.
Because of the stimulus, but when you think about the way your businesses today, and we kind of fast for 1 or 2 years. How are you thinking about the overall loss in normalized losses for east west today than maybe pre pandemic.
Okay.
Yeah. That's of Great question, you know I think if you look at our portfolio.
And the categories of loans that we have the main category CRE C&I and SF are certainly historical experience that we've had from the resident.
All of it has been excellent losses had been really negligible.
On the CRE side as well historically.
As you think about ex construction during the credit crisis on our income producing CRE has also the credit quality has been good particularly relative to peers I think on the CNI side. What we're trying to do is make sure. We don't have too many concentrations in 1 area of 1 sector to ensure.
For that our credit quality is something that continues perhaps you know kind of the good true reactor we have right now so when we look at that.
Careful and I think there were some questions earlier during the call as far as you know right versus structure, particularly I think for the commercial loans CRE C&I, we're careful from the perspective of not giving up our structure.
The company for right.
Okay.
Okay, great and if I, if I could just add.
Kind of a modeling question.
<unk> said, 15% of on the tax rate.
Do you have what the remaining associated and would be at that run through the channel.
Yes 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 of the third quarter Chris.
70 million got it thank you.
The next question will come from David <unk> with Wedbush Securities. Please go ahead.
Hi, Thanks, I had a follow up on the 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 of entertainment and clean energy could you talk about that in any new team hires that's helping that growth.
We continue to sort of like strategically add.
New talents into various teams.
No.
For example, like but you know and then entertainment actually we only add.
1.
Full time individuals however.
I think just at the.
The team for the last.
The 6 to 9 months has been going very strong.
And what we'll find is that the.
The beauty of this.
Our diversification strategy is debt, we have so many different industry verticals.
And we have so many well I'm not I wouldn't say so many waiver of quite a few of very attractive.
Geographic footprint and various.
Areas, such as from New York to Texas too.
For Washington State of Massachusetts, and then of course note, we got a lion's share of the business in the state of California.
Let's not forget of we do have Hong Kong and also Oh offices in China.
So they are at various time.
Would have stronger performance 1 quarter over the next.
So if you recall I think last year, we mentioned private equity quite a bit.
The last 6 months.
They have not yet have the kind of strong performance like entertainment of clean energy, but.
But I would expect that maybe in the next 2 quarters I stopped mentioning them again.
So we obviously have many different Uh huh.
Sectors that we can.
Sort of like get the to get the engine going and don't forget we've got.
Substantial.
The balances.
Balances in the.
Manufacturing.
Wholesale distribution.
And also even international trade, so any different sectors can potentially rise up and it just I would say that but if you look at the second quarter.
Yeah.
Entertainment.
Clean energy and general.
C&I and related to manufacturing on wholesale all of those few that actually have.
Better performance than the others, but it will keep changing.
It will keep changing but that's the whole idea because of all.
The strong teams and 1 way or the other there are going to be quarters that someone's going to do better than the other and so forth.
That's helpful. Thanks for that and the follow up on credit quality, you had called out the seasonal day, 1 reserve of $1.3 9% 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 bad.
When we look at and also I want to kind of pointed out the.
The largest driver for this is really the macro economic forecast, which is very different than day..1 sees all with that said I mean, I think if you look at the trajectory of where we're at right 1% of detail.
And down from the peak earlier of close to 180 and seasonal day..1 139, I think it's realistic that we can get down to that level on David.
This concludes our question and answer session I would like to turn the conference back over to Mr. Dominic Inc. 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 sometimes in October.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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