Q2 2020 East West Bancorp Inc Earnings Call
East West Bancorp second quarter 2020 earnings conference call.
All participants will be in listen only about do you need assistance. Please secondly conference specialist by pressing star keep all that buys euro.
After today's presentation, there will be an opportunity to ask questions.
Please note this event is being recorded.
Now ill turn the conference over to Julianna Balicka director of strategy and corporate development. Please go ahead.
Good morning.
[music] for the second quarter Twentytwenty with me on this conference call today are done.
Chairman and Chief Executive Officer, and Irene Oh, Chief Financial Officer, we would like to caution you that during the course of local management may make projections or other forward looking statements regarding about <unk>.
Okay got the company within the meaning of the Safe Harbor provision of the private Securities Litigation Reform Act like 95.
Forward looking statements may differ materially from the actual results due to a number of risks and uncertainties for more detailed description of the risk factors that could affect the company's operating results. Please refer to our filings with the Securities Exchange Commission included in our annual report on form 10-K for the year ended December 31st 2019. In addition.
The numbers reference on its called pertain to adjusted numbers. Please refer to our second quarter earnings release for the reconciliation of GAAP to non-GAAP it actually.
[music].
We will be referencing slide deck.
[music] webcast than others.
Let's say a reminder, today's call is being recorded.
Be available for replay format.
[music] I'll now turn the call overseas Dominic.
Thank you Judy I know good morning.
Thank you everyone for joining us for a second quarter 2020 earnings call.
Before we go into our financial results.
First off I would like to talk all about 4200 associates for their dedication.
Providing our customers would see most so that's during these unprecedented times.
Oh team's commitment to putting our clients first.
True reflection of our values.
That's a government doesn't do it yourself so so those.
We remain open and I'll branch associates out there every day to help customers.
Back in early April out of 125 locations.
We strategically close to 13 branches for the purpose of creating access resource capacity.
Part about business contingency plan under the pandemic.
Oh practice, but opened and resumed normal hours at the end of June.
As an organization.
Well one priority is to provide a safe operating environments for both associates and all customers.
To that end.
Adopted or about locations with enhanced safety I find it that's what measures.
We continue work from home plan for non branch associates.
And the transition to remote work has been very successful.
In terms of productivity.
We have developed detailed return to office plan.
Gradual.
Hi, I used to return for associates.
No mindful about mission to support our customers and communities that we serve through these challenging times.
We funded $1.8 billion, Oh S.P.A.P.P.P. loans.
During the second quarter.
<unk> over.
7200, small to medium sized business and non profit organizations.
The cumulatively support over 170000 employees.
He didn't long priced the medium long size that we funded was 60000.
And over 60% off the lows well under 100000 inside.
In addition.
Oh.
1200, all the customers, we provide a P.P.P. loans to Oh.
New customers for East West Bank.
Well east West the bottom line is that how customers were driving before this crisis.
And we will help them through the crisis to fly so Gary.
When dependent makers.
Two data, we offer various payment accommodations and defer rose.
<unk> impact.
Commercial and consumer customers.
The second quarter at 8%, although total loss received a cold, but 19 related payment deferral.
[music].
Oh these modifications.
80% or three months to girl.
Yes, you can see the detailed on slide three.
As of June 32020.
Only 1%.
I'll see an eye loan portfolio was subject to deferral.
But the deferral rate.
At the total commercial real estate portfolio was six was 10%.
Oh, the 1.6 billion and see a nice and see all year long deferrals.
700 million.
45%.
Still making partial payment.
During the deferral period.
Lastly, the deferral rate of all residential mortgage loans.
So think of single family mortgages.
And the home equity line of credit teed off.
Was 14%.
You can see from the low weighted average loan to value associated with the differentials.
Which all 53%.
Well see how are you.
And 51% for residential mortgage.
Our customers have a lot of equity in their property.
These deferrals have been to our core customers.
Well committed to maintaining the whole.
Oh projects.
Despite the temporary shortfalls in cash flow.
The volume of requests for commercial real estate long deferrals peaked in may.
For residential mortgage.
It peaked in April.
Well see an <unk> it happy.
You do us in Cradic by loan.
Industry.
No I wouldn't move onto reviewed financial condition.
The results of this quarter on slide four of the presentation.
This morning.
We reported second quarter 2020, net income of 99 million, Oh 70 cents per share.
Compared to first quarter net income of 145 million or one dollar per share.
Second quarter results include 102 million provision for credit.
So.
Which negatively impact any net income.
Despite the challenging circumstances <unk> financial results continue to be solid.
Reflecting the resilience of our business model.
Resulting in a return on tangible equity up 9%.
In the second quarter, we generate a total revenue of 402 million and earn pretax pre provision net income of 249 million equivalent to a pretax pre provision profitability ratio.
Oh, 2.08%.
In the bottom chart of slide full.
You can see that our P. T P P income.
M.P. TPP profitability ratio.
Have withstood the steep drop in interest rate with the dollar to stability.
But over 2%.
P to P. P ratio remains strong.
Reflects the fundamental recurring earning power although franchise.
And provides ample cushion.
To absorb credit cost.
During this economic uncertainty.
An important bearable, helping us maintain our pretax pre provision profitability is our industry, leading no efficiency ratio.
In the second quarter, how adjusted operating efficiency ratio.
Was 38.1%.
Let's move onto slide five.
Well summary view of our balance sheet.
From an enterprise risk management perspective, we're navigating this crisis from a position of strength.
Our balance sheet is strong.
We have high levels of liquidity and capital [noise].
And our loan and deposit portfolios, a well diversified.
In the second quarter, we grew total loans by 15% analyzed and deposit by impressive 21% annualized.
Our loan to deposit ratio as of June Thirtyth was 91.5%.
Compared to 92.8% as of March 31st.
The quarter over quarter decreased the loan deposit ratio reflects the strong deposit growth in the second quarter.
Also oh, greater China balance sheet into loans of 1.2 billion.
Which were down 2%.
Quarter over quarter.
And deposits up 2.2 billion.
Which grew by 7% since March 31st.
Additionally, we funded the P.P.P. loans through the P.P.P. liquidity facility.
By drawing on 1.4 billion.
Strengthening our already substantial liquidity and bolstering our balance sheet kept K.
Capacity.
To serve our customers.
Turning to slide six you can see that east west capital ratios.
Strong and growing.
And at some of the highest amount regional banks, particularly for common and tier one equity.
A book value of tangible equity per share what both.
2%.
From the prior quarter.
Book value [noise].
The end of June was $35.25.
And tangible equity per share was 30 $1.81 cents 86 cents.
You can see from a charge at that our risk based capital ratios common equity tier one tier.
Tier one capital.
And total capital.
Oh increased quarter over quarter.
Our board of directors have declared third quarter 2000 twice dividends for the common companies common stock.
The common stock cash dividend of 27.5 cents is payable August 17 2020.
To stockholders of record on August 420, 20.
We did not do it any buybacks during the second quarter.
Now, let's move to slice up.
We have a discussion by loan portfolio.
As of June 30, total loans, we see a record 37.2 billion.
An increase of 1.3 billion.
Oh, 15% linked quarter analyzed.
Average loss of 37.1 billion grew by 23% linked quarter annualized.
During the second quarter loan growth came from P.P. laws as well as from our commercial real estate.
And residential mortgage portfolios.
Average total C O U loans grew by 11 cents linked quarter annualized an average residential mortgage loans grew by 12%.
Linked quarter annualized.
This mix of growth demonstrates the benefits of east west well diversified loan portfolio.
Providing us with their ability to generate responsible an attractive growth.
Even under challenging economic conditions.
As of June Thirtyth, P.P.P. laws were 1.7 billion and the average balance.
During the second quarter was 1.5 billion.
At this point, we expect forgiveness of P.P. lost to begin.
Later in the third quarter.
Resulting in substantial reductions of these loan balances.
Before the end up this year.
Excluding PV P.C.N. I loan balances decreased.
Pay off what distributor.
Across the C N I portfolio.
Recall that at the end of the first quarter.
We saw run up and draw downs from I'll see an eye clients, reflecting market liquidity fears person at that time.
Thanks in part to the sizable.
Well intervention.
Liquidity skier subside and some of those draws reversed.
You can see this in the utilization statistics.
So that's been sodium I'll see alive.
Line utilization was 72%.
Moderating from 75%.
Three months ago and in line was 71% Ass off your ran off 2019.
The rate of decreasing now see an eye loan portfolio was highest in April and May.
Moderated.
In June.
Noticeably C N I loan pipelines have picked up since June.
And we are seeing broad based deal flows from across our portfolio.
Including in private equity capital call lines.
Cross border business.
And entertainment.
During the second quarter, we also undertook a vigorous review of our loan portfolio.
Evaluating credit exposure is for sensitivity to prospective weakening economic conditions.
Through this process.
Really viewed over 50% of I'll see an eye and see how your lungs.
The particular focus on sectors.
Oh, hi risk do independently.
The reviews focus on up today financials and information from our customers.
How are they were adapting operations to the pandemic conditions.
What would the sources of stress for that.
Giving us better visibility into their current situation.
Overall.
Many of our customers up in positions a financial strength.
Hi liquidity.
Collateral value and actually.
And have made the business changes necessary to adapt to the new environment.
However.
Due to the shutdowns.
Businesses experienced and.
The brought impact.
After global pandemic on consumer behavior.
Downgrade it a small percentage.
These loans that we view.
Overall.
The increase in criticized loans was primary from the oil and gas industry.
These long reviews were in addition to our normal loan review practices.
And we will continue this heightened.
It took me just process for the duration.
After credit cycle.
Continue on slide eight.
We show a detailed breakdown of our CNR loan portfolio.
Yeah, not longs excluding P. P. P were 11.7 billion as of June 30, or 31% of total loans.
As you can see up a photo is well diversified by industry.
Oh, I guess exposure as of June Thirtyth wasn't 1.3 billion of loans outstanding and 1.6 billion.
Total commitment.
From March 31st until July 19, our total oil and gas commitments decreased by 11%.
Following the spring.
Borrowing base Redetermination period, as well as through exits of southern walk Alex.
Now within the U.N.P. portfolio.
73% M.P. clients or production is hedged for 2020.
And 46%.
Is hedged for 2021.
First of all of their gas production.
74% is hedged for 2020.
And 61% is hatch for 2021.
As of June 32028, the allowance for loan losses coverage about wanting gas portfolio plus 9%.
We feel comfortable with this level reserve for potential losses.
Especially in light of current commodity prices.
Which have recover from the trough.
[noise] moving onto slide nine.
As of June Thirtyth.
I'll see all your portfolio was 14.5 billion equivalent to 39% of total loans.
The portfolios will well balanced across the major property types of retail multifamily office industrial and hotel.
The geographic distribution of our portfolio generally reflects our branch footprint and that's off June 30 owner occupied C.L. He was 2.2 billion equivalent to 6% of total loans, all 15% of total see our yield.
Including unfunded commitments, our total exposure to construction in Orlando is small.
Under 1 billion.
Oh construction portfolio is well diversified by property type with a weighted average loan to value of a low 52% based on total commitment.
You can see on slide 10 that the weighted average loan to value about total see how you portfolio was 52% with an average loan size of 2.3 million.
Nearly 90% of I'll see you don't happen long term value of 65% alone.
In the chart on the right you can see that the weighted average loan to value of our loans a similar.
<unk> property type.
I was just real consistent underwriting too low loan to value has resulted in no credit losses through many credit cycles.
Non income producing see how you portfolios.
Furthermore, a high percentage of I'll see you long have full recourse and personal guarantees from borrowers who have long term relationship with east West Bank.
On slide 11, and 12 would provide additional details regarding our single family residential and he'll off long.
On Slide 11, you can see that the geographic distribution of our single family residential mortgage portfolio follows our branch footprint.
[noise] Oh single family residential mortgages are primary originated through our east West Bank branches.
Average loan size in out SFR portfolio is only 385000.
And a weighted average loan to values 53%.
More than 90% of our long half and loan to value of 60% or less.
We have a long history, a minimal credit losses from a single family mortgages.
In the second quarter, we originate a combined 777 million of residential mortgage loans.
Comprising 567 million in single family mortgages, and 210 million in home equity lines of credit.
The combined second quarter residential mortgage origination volume increased 6% quarter over quarter.
Production dipped in April, but regain pace in May and June.
In fact.
Residential mortgage production in June was the strongest on record for East West Bank.
Contributing factors to the growth were increases in he'll off originations and in refinanced transactions.
In the second quarter refinanced transactions increased to 68% of volume compared to 62% into first quarter.
Based on the current pipeline, we expect strong residential mortgage origination volumes for the rest of the.
On Slide 12, you can see the geographic distribution and a long term value distribution.
Hi, Sheila portfolio.
Similar to single family residential mortgage.
She had all our primary originally originated through east West Bank branches.
As of June 30, we have 1.5 billion off he locks outstanding.
Yes, 1.6 billion and dispersed commitments.
Translating into a utilization rate of 48%.
East West that he lost we originate a very similar in credit profile <unk> SFR loans.
As of June 30, weirdness first lien position for 84% of hockey logs.
The average loan size of I feel all commitment was 362000.
And the weighted average combined loan to values was only 49%.
97% of our he'll commitments have a loan to value of Oh under 60%.
Lastly, I would highlight that the rates of single family originations have been fairly stable [noise].
The weighted average yield in the second quarter was 4.3%.
Compared to 4.4% in the first.
First lien keylock rates are priced at the prime rate plus a margin of 50 basis point.
Well now turn the call until I read for more detailed discussion about allowances and asset quality deposit an income statement I agree.
Thank you Dominic.
Turning to slide 13 for a review of our allowance for loan losses on slide 14 for you.
Other asset quality metrics, our allowance for loan losses was 632 million as of June 30 at a 1.7% of loans held for investment compared to 557 million a 1.55% of loans as of March 31st quarter over quarter.
The allowance coverage on the oil and gas portfolio increased 412 basis points to 9%. They convert them all other cnine increased by 28 basis points to 2.6% and the cover just see Ari increased by 38 basis point to 1.5% driven by increases in reserves for hotel.
Well and retail commercial real estate loans.
During the second quarter up 2020, we bought 102 million provision for credit losses, compared to 74 million in the first quarter to quarter over quarter increase in the provision expense was primarily driven by a more adverse macroeconomic forecast as of June Thirtyth 2020 relative to March 31st.
As well as loan risk rating downgrades during the quarter.
All else equal at that macro economic outlook stabilizes, we would expect the provision expense decreased from current levels. As you will see on the next slide excluding oil and gas loans, we are not see significant deterioration in our portfolio by any particular industry or asset class the low low.
Two values of our real estate portfolio provide a buffer against losses on the right a deferral remain manageable.
Net charge offs in the second quarter, we just under 20 million and the net charge off ratio was 21 basis point than average loans annualized charge offs in the second quarter were primarily from oil and gas, which accounted for 14 million or 64% of gross charge offs.
Turning to slide 14, criticize loans were 3.4% of total loans as of June Thirtyth.
Or 1.25 dog and you can see from the charts on the slide that the largest single industry component of our criticized loans, our oil and gas loan.
Nearly equal size should the criticize loans all other cnine.
Oil and gas loans made up 24% of our special mentioned loans and 41% of our classified loans as of June Thirtyth.
Special mentioned loans were 1.5% of total loans as of June Thirtyth or 576 million. This way show a stable quarter over quarter, 11% of our oil and gas loans were graded special mention as at June 30 up from 5% as of March 31st full all other she and I see army.
I realize it's essential mortgage loans, the special mentioned, Michelle was essentially stable quarter over quarter.
Classified loans were 1.8% of total loans as of June Thirtyth, and the amount of 674 million compared to a ratio of 1.2% as of March 31st quarter over quarter increase in classified loans was largely driven by downgrades of oil and gas loans, the classified percentage of our oil and gas.
<unk> was 22% as of June Thirtyth up from 4% as of March 31st for all other see an eye loans the classified loan ratio improved from 2.3% to 1.6% quarter over quarter outside oil and gas the rest of RC and I loan portfolio remained stable.
Evidenced by these asset quality ratios as well as by the low deferral rate of RC and I loans.
The classified loan May show for commercial real estate was 1.4% as of June Thirtyth upfront, 0.7% as of March 31st the largest inflow into classified commercial real estate in the second quarter or from office and retail CRB segments. The classified ratio of residential mortgages was essentially state.
<unk> quarter over quarter nonaccrual loans were 48 basis points of total loans or 179 million as of June thirtyth the quarter over quarter increase was largely due to inflows of nonaccrual status of oil and gas and commercial real estate loans, partially offset by pay offs and charge offs at sea and I Love.
Lastly, accruing loans 30 to 89 days past due but 30 basis points up total loans are 117 million as of June Thirtyth now moving on to slide 15 for a discussion of deposits.
Total deposits grew to a record 40.7 billion as of June Thirtyth 2028, an increase of 2 billion EUR, 21% linked quarter annualized average deposit of 39.9 billion grew 2.4 billion EUR, 26% linked quarter annualized growth an average non interest bearing.
Demand deposits was 2.4 billion quarter over quarter, what empresa, 87% linked quarter annualized average D.A. increased to 34% of total deposits in the second quarter up from 30% in the first quarter.
Average deposit growth and the second quarter was driven by strong growth from consumer and small business commercial customers as well that's from P.P. funds held in deposit accounts, partially offset by intentional run off of higher cost deposits.
Attribute this growth to customers choosing to remain very liquid in this environment at lower levels of business spending during the shot down periods, while we expect customer liquidity to remain elevated during the course of the pandemic. We also expect balances the trend down as business and consumer activity was you do.
During the second quarter, we also intentionally would do some higher cost deposits, giving the strong growth in deposits. The average total cost of deposits was 47 basis point in the second quarter and the spot rate as of June Thirtyth was 39 basis points. The average cost of interest bearing deposits was 71 basis points in the second quarter and the spot rate.
As of June 30, it was 59 basis points.
We expect to continue to decrease deposit cost for the rest of the year from the repricing downward a maturing Cds as well as from folder run off a power cost balances as of June thirtyth spot rate on domestic Cds was 1.08 for the maturities of Cds with the interest rate over 1% are.
2 billion in the third quarter at a blended rate of 156 1.4 billion into fourth quarter at a blended rate up 145, and 1.3 billion into first quarter of 2021 at a blended rate of 120 cents for context, the blended rate of CD originations and renewals in the second quarter was 43.
Basis points.
Now moving onto a discussion of our income statement, starting with slide 16, I will share highlights not discussed in detail elsewhere. During this presentation.
On this slide.
We purchased investment securities during the market dislocation earlier in the quarter and sold 132 million of municipal bonds for a gain on sale of 10 million. We also Pee paid 150 million people liabilities to help improve our future funding costs incurring a debt extinguishment cost of 9 million.
During the second quarter, the effective tax rate was unchanged at 12% for both the second and the first quarter.
Moving on to slide 17 for discussion of our net interest income and net interest margin second quarter 2020 net interest income.
344 million decreased by 19 million or 5% late quarter and the net interest margin of three or four compressed by 40 basis points from the prior quarter second quarter net interest income included 21 million a P.P.P. loan income net.
Interest expense on the P.P.P.L. up excluding this PPP related income second quarter net interest margin was to 96, the changes and the net interest income and the net interest margin reflect the quarter over quarter drop and the average prime and LIBOR rate.
31% of our loan portfolio is tied to LIBOR predominantly though one month weight and 27% of our loan portfolio is tied to prime accordingly, the average loan yields in our portfolio compressed by 73 basis points quarter over quarter, just 398 in the second quarter from 471 into first quarter.
Against the backdrop, a materially lower interest rate declines in earning asset yields were partially offset by decreases and the cost of funds.
The quarter over quarter change at our net interest margin is as follows.
65 basis point decrease from lower loan yields 10 basis point decrease from lower yields on other earning assets, an eight basis points decrease or balance sheet mix shift all of which were partially offset by a 35 basis point increase from lower funding costs and a positive impact of eight.
Basis points from PPP.
We expect that our net interest margin.
According to variability from recognition of P.P.P. loan fees will stabilize around current levels in the neighborhood of 3%.
Our loan portfolio has largely already we priced and three pricing was front loaded into the second quarter. The yields on residential mortgage loan originations have been more resilient to rate compression and as Dominic mentioned loan pipelines are rebuilding which will continue.
And contribute to a favorable earning asset we [noise].
We expect to continue to improve our cost of deposits with a downward repricing of Cds to current market rates as well.
Now turning to slide 18, total noninterest income and the second quarter was 59 million compared to 54 million in the first quarter. The income and net gains on sales of loans were 52 million in the second quarter down by 2 million or 4% quarter over quarter. This decrease reflects lower customer.
And that's in volume across several fee income lines of business.
Another fee income categories lending fees of 22 million into second quarter increased by 6 million, primarily due to increasing the valuation avoidance receipt as part of lending relationships.
Moving onto slide 19 second quarter noninterest expense was 188 million, an increase of 5% linked quarter, excluding debt extinguishment cost, but the repos amortization of tax quite an other investments and the core deposit intangible amortization, our adjusted noninterest expense was 100 and.
53 million in the second quarter.
Decreased a 5% quarter over quarter, and a decrease of 4% year over year. The largest linked quarter change was a 5 million decreasing compensation employee benefits expense, followed by 2 million decrease and other operating expenses.
2 million decreased and legal expense notable decreases and other operating expenses include marketing promotion expenses and travel expenses.
Our second quarter adjusted efficiency ratio was 38 spot 1%.
Over the past five quarters, our efficiency ratio has ranged from 37.7% to 38.5% as an organization we remain committed to controlling expenses across the board.
With that I'll now turn the call back to dominant for closing remarks. Thank you Irene.
Well this has been a quarter like no other [noise].
Given not only tough economic conditions.
But also the toughest of health and social circumstances.
I'm proud of the way our associates have handled the challenge and deliver for our clients.
Simplifying east west values and culture.
As an organization, we remain vigilant about credit risk management.
Maintaining a strong balance sheet with above peers capital ratios.
We are committed to delivering responsible growth.
Managing controllable expenses.
And building sustainable profitability.
I will now open up the call to questions operator.
Thank you we will now begin the question and answer session you asking question.
Then one on your touched on sound. If you are using me speakerphone. Please pick up your handset before passing the key to.
You withdraw your question. Please press Star then Q.
As a reminder, today, we ask that you please limit yourself to two questions.
At this time, we will pass momentarily to assemble the roster.
So first question today comes from Ebrahim Poonawala of Bank of America. Please go ahead.
Good morning.
Good morning.
Yeah, you give some that machine.
Thanks for all each all the details on credit, but if you could you spend some more tightened dad. After the reviewed that you talked about Dr. Was just don't don't don't downside risks to your puzzled levels. When you think about wanting the energy portfolio you sold one of the banks take a 50% Mark and so some of these mills. So if you could have.
Yes, you ought energy book in the context of that and then also the CRD book like if the 50, 55% LTV, which look relatively low are those are good kind of buffer. Let me think about certain hospitality properties that may never recover from the standpoint, maybe give us a central to accomplish that all of those portfolios if you.
Cookies.
Okay, Oh first on the oil and gas.
When you up we I mean, I can really a comment much about.
Hang called Whitney because well portfolio are quite different to us and accent.
And why the motivation off selling at such a steep discount we'd done pretty much most of our spring Redetermination, we do not see that type of deficiency.
Like.
That will be causing us to wanted to take this kind of.
Bassett discount.
And basically we're going through just loan by loan.
And I'm looking at.
The current situation.
And most most updated.
Financial information and the engineering reports from this spring Redetermination.
And come up with the research studies needed.
We feel that we have very adequate.
Were adequately.
Uh huh.
Cover our oil and gas portfolio as of today would that 9% of reserve coverage.
So we feel pretty good or bad and we have appropriately classified.
You know the loans that need to be classified.
And so forth.
Now, let's go to the CRT.
Yes.
That's 50, some odd percent loan to value is very.
I think is very good in terms of as a cushion.
To help against losses.
We have.
[laughter] 30, 40 years of history at East was in many different credit cycles.
Got you and then you're out when it comes to income producing properties.
Okay.
The low loan to value makes a big difference I think for the hotels can also add.
We are doing business with hotel operators that are very experienced and just trade.
And these are high quality operator.
And also many of them have substantial liquidity.
There are many of them also have.
Put into personal guarantee.
So yes, there are some hotels you know there's gonna be having some challenge because of the current pandemic, the calling the occupancy rate dropping very low.
But the fact is.
So far what we have seen if that.
Some of these hotels have gradually reopened I know that they're all going to be always some setback with sudden state incident studies that may have to.
Shutdown for it.
Period of time.
Eventually.
The economy have to open up.
We just have to find ways to protect ourselves while still working so I would expect that somebody's hotels with graduate still open back up and we do have.
Our borrowers who have more liquidity.
And have that person no.
Oh financial net worth at stake that I think will be substantially more motivated so from that standpoint, once we look at pretty much almost all of the hotel rooms.
And we do feel pretty comfortable right now that we up more than adequate reserves to cover the commercial real estate portfolio.
Thank you next question comes from Jared Shaw of Wells Fargo. Please go ahead.
Hi, good morning.
I guess for the for the first question sticking with with credit when we look at some of the.
Yeah, most troubled I guess.
That's hotels or.
<unk> restaurants.
How are you looking at sort of the long term resolution that should we assume that those just stay on.
<unk> continued deferral and that's that's allowed under the cares actor or would you.
Back to see more of an active restructuring.
The most troubled loans before before year end and try to get them onto a new system or a new a new structure.
Well first of all I think that as I mentioned earlier over 90% off our.
Our payment deferrals.
I actually only three months.
So based on our conversation with the customers.
Oh, the Wanda request a deferral.
Really oh.
Don't anticipate that they would need another three months.
Or six months deferral and so at this stage.
Well granted.
Some of them have support from P.P. loans.
So we'll have to see what a.
Beyond the P. P P.
What the stimulus package that maybe coming from the government.
Well, maybe some of them, possibly qualify for the main main street lending program and so forth. So there are many different sources of support but all in all but when I look at particular for their hotel.
And some of the retail customers when we go through loan by loan.
So many of them did not even ask for payment before.
Keep in mind, a vast majority if you look at its only 10% of our.
Only 10% of RCR you customer asphalt.
Payment deferral.
The vast majority of our customers don't even need that because they have the personal liquidity.
Oh for whatever reason.
The nature of that particular income producing property.
Allow them to still have enough cash flow.
To service the debt and that's the beauty about having.
First trustee low loan to value alone.
Because the.
Mortgage payment for P and I combine.
I'm not as taxing.
As those what I call conventional borrowers will borrow 70, 75%.
And I'm struggling a little bit so I think from that standpoint that there's no question that we were going to half a few more customers potentially may have to come back.
Due to whatever various reason that we have to do maybe somewhat of a additional modification and we'll walk with them one by one but at this stage right now I think overall is looking pretty good for us.
Thanks again.
The scene I long pipeline last quarter, you seemed I guess, a little more cautious on on growth this quarter. It sounds like the pipelines are starting to boost again.
Looking at underwriting a in this environment and I guess, what's the what do you use the opportunity for near term.
That's right.
Sure.
Yeah, I think ever since in fact ever since late January a when dependent of course happened in the ball Han.
Oh, we have implement internally.
The covert 19.
View every single loan that we approved.
Have to go through the.
Oh.
Sort of like evaluation about how does cobot 19 effect.
This particular business. So that in addition to looking at the like for example, like back in February and March or so in addition, just looking at you know the financial statement as of 12, 31, and then everything looks fine and Andy.
We look at the situation as it and say that hey.
With a pandemic.
How would this business is gonna be able to carry on and then next six months 12 month, but they have enough liquidity to get bye.
Are they in a business that actually have benefiting.
From the pandemic, because then E commerce business, all day, and some type of business, although they are making face masks that actually helping them. So we looked at all of the different factors or there's something that is positive to what extend this positivity can only last for six months.
And so forth. So we looked at all of those different factors to determine.
I'll now to credit.
Yeah.
Worthiness and making sure that we do not go in here now and go into mic alone using a formula.
Our pre covert 19, and then end up getting outsell and more problem a few months down the road. So that's the kind of like a bigger that you will use and so far I think that we fine business.
Now we able to.
Oh.
Sort of like bringing as new customers and we also have existing customers now, it's not going back and doing more business and we continue to support on these type of endeavors.
Thank you. The next question comes from Ken Zerbe of Morgan Stanley. Please go ahead.
Great. Thanks, I guess, maybe first question for Irene.
So just help us understand the benefit of the P.P. loans this quarter, because if I look at them out you have $1.7 billion of loans pay up 23 trucks or $21.3 billion a fees her income, which kind of amounts to about a 5% annualized yield which seems a bit high opposed to understand that please.
Sure I be delighted to do that for you. So if you look at that 21 million dollar of PPP related loan income that is the one part of it it's the 1% on that works away and additional we estimate and what we thought the life would be for the PTP loans.
By alone and based on that we have accreted part of that a fee income during the quarter.
So the combination of that is a 21 million. So you know I'll break that down for you. The amount that we have created was about 17.5 million in the second quarter.
Well.
We're estimating the that the life of the loans will be shorter than the contractual period, which for US is generally two years in total for some of the loans. Some just based on the activity and what we're seeing and what we know about the customers. We are assuming that I'll go through the full contractual life of the two years plus.
Got it so in essence that if you assume alone has say a six month wife Indian 3% fee on that low and you're basically taking the entire 3% fee over.
The six month period is at the right I understand that.
That's correct.
Got it okay, and if I can speak and sort of sort of a second question.
Just in terms provision expense Irene you did mentioned that provision expense should decline, which I think we all generally agreed provision expense should decline. If there was no further deterioration to your macro economic assumptions, but is there anything unique about east west that would lead that provision to decline a little bit less or more or I'm just trying.
And to get a magnitude of of whether it goes from 100 million down to.
80, or 100 down to 20.
Theres no further deterioration.
Yeah.
That's a great question I don't know if you look kind of portfolio by portfolio I don't know there any kind of unique characteristics and that's why our relative to others. What the same macroeconomic environment, we use Moody's the baseline as the backbone of our allowance calculation.
Would be that different from other banks quite frankly, you know I do think kind of in continuation the comments that we've made as far as the resiliency of our customers income producing commercial real estate reviews that we've done the single family customers the amount of equity that they have those are portfolios can direct competition that.
Ultimately the loss content will be reasonable reasonably low relative to others, but I don't know as aside from the oil and gas, which we talked about you know we see anything really stand at this point.
Thank you then next question comes from Michael Young of Suntrust. Please go ahead.
Hey, Thanks for taking the question maybe just a quick follow up on that point Irene just within the portfolio I think you've got a little over 2% reserve.
Remaining loans ex oil and gas can you talk about what areas you are watching more closely in there whether it be entertainment and what's in that bucket or second life Sciences are there other other things that we should be keeping an eye out for it. It does seem like there's might be the higher loss given default areas.
Yeah, you know candidly speaking I think.
We are looking at all the portfolio's, especially with a pen down that you know the concerns. The cash flows you know the different circumstances are very good friend and the for the pandemic. So we're looking at as far as you know what's happening what their business, what's the cash flow out.
Strengthened the guarantors and the borrowers as well from a allowance perspective, specifically I don't think that aside from oil and gas. If you look at industry by industry, There's anything very unique what's how much we reserved there are certain portfolios for example.
We have a equipment leasing portfolio at a longer life. The amount of reserve for that is higher but aside from that I wouldn't say that there was anything very unique industry wide.
Okay and this one maybe a bit of Ah oddball question, but just kind of just bigger picture on what's going on with Hong Kong I'm right now in China and U.S. rhetoric.
Are there any things that we should be thinking about relative to kind of the Hong Kong specific or trying to mainland operation that could flow back three to east West. It you know things were to deteriorate there.
Well I think.
On the Hong Kong situation.
Let me just maybe see we can't break it out into a few different scenario.
Lets just say the worst case scenario.
The worst case scenario will be.
Let's say that a U.S. government order all U.S. banks to retreat back to U.S. and no longer allow to be doing business or no longer allow to have offices in Hong Kong or something like that after I look as the worst case scenario.
I'll keep in mind that Oh, we have so far as of today only.
3%.
I'll follow known.
In greater China region. So for example.
You look at $37 billion alone outstanding today, the only 1.2 billion in pretty China, that's even including Hong Kong. So we've cut that half of that in Hong Kong, knowing that China and Hong Kong combined have done in Hong Kong, So, we're not talking about less than 1.5% or so.
Of our total loan portfolio and the if you look at our history.
For the last 13 years in Hong Kong.
The loss rate.
Delinquency nonperforming asset and so far has been extraordinary low.
So as of today, if we look at what's been happening Hong Kong went through the pandemic for six months.
And we had no losses.
So I feel pretty good that if we end up just having to all come back home.
I will talk about revenue risk, it's very minimal.
We obviously just last quarter.
Oh through all loans by 15% analyzed so there's really no reason.
For us to worry about one half percent.
Oh no reduction so we feel pretty good about.
Even if the worst case scenario, we're not gonna have much lost any losses are we going to end the top of revenue risks, we can't get a color.
But that is extremely extremely unlikely scenario.
Because you know I looked at it and Hong Kong.
In a 1997 when there was that had over all [noise].
Hong Kong problems, the British government to China.
No after 99 years of Hong Kong being colonized Bye Bye, England.
The fact is everyone. In 1997 was concerned about that was the I know Hong Kong.
Our Singapore have picked up a lot of business.
Our Vancouver, Toronto sit need to Melbourne, all picked up on our new business.
And every one thing that everyone is going to be gone and no longer Hong Kong no longer is gonna be viable.
I didn't think so I was there at the Hanover ceremony.
Had some discussion with many different business leaders around the world.
And now while some of them have pessimistic view that many other have optimistic view at the end today.
Since 1997, Hong Kong have done extraordinarily well.
And so from my perspective is that.
The more likely scenarios that we gonna have see some noises.
Within the next 12 to 24 months and Hong Kong will be different in us in the standpoint of now that maybe not as much.
The business that Hong Kong is currently doing.
Like that we'll be doing into future, but the connecting with a greater base of China.
Oh, the southern provinces, so China connecting to Hong Kong is going to create enormous amount opportunity phone call.
If you look at and financial bite dance a few of these over $100 billion.
Oh.
Potential IPO there'll be more and more of those go into Hong Kong. So Hong Kong is still going to have a place [noise] and if I look at our existing customers.
For the last several months by the way most of them actually have to.
Had a business headquarter in it and India, British Virgin Island, and then.
Type of an entity anyway.
And.
They were navigating through this challenging time in Hong Kong, just fine and we're continuing to walk with private equity funds.
And.
For them to move to Singapore, and then other places it will be very easy. So I don't think that though that pick up a challenge from a business point of view.
But there's no question.
There's no question.
That.
The political noise.
Oh, well continue to be a major distraction because no matter what if every day that you read the newspaper what you see is the.
Headline news about.
Something terrible happening in Hong Kong, and so forth a it does you know have a perception breast there that we have to recognize but unless you have seen so far but the last two or three years, whether in China on the tariffs situation.
East West navigate through the last three years.
With this.
Heavy U.S. China.
Political bash.
Regarding to Tara.
And somehow we navigate through and have very minimal losses.
And continue to be able to.
Maintained our business and going forward, we're gonna be nimble.
And we're going to be pretty flexible.
And whenever there are certain business.
Caused by.
The political risk that we should no longer engaged.
We move forward to other business that is appropriate for us to do.
And I wanted to do a highlight one other thing is that.
It's all these political rhetoric sets going on.
For the last few years.
In fact in the last six months intensify substantially.
And I would expect that there would be three more three and half more months to go.
Just before subside.
And with this political rhetoric, so I was going on.
U.S. investment in China for the NAV last six months actually had increased.
Oh, the media don't talk about in much.
But if you look at the true statistics for my.
Like investment from the United States to China has actually increased.
Business folks still see the potential.
I still investing in China.
In fact, China's steel welcoming U.S. business as you can see what they've done for Tesla or JP Morgan.
Mastercard I mean, they continue to welcome U.S. business to China.
And those businesses continue to taking advantage or those new.
[noise], new licenses that were able to acquire on new acquisition, they can make and so.
It's a very interesting dynamic in terms of.
The political rhetoric was what's happening in terms of the day to day business.
And East West Bank apolitical.
We are we stay neutral and we're focusing on taking care of business, our clients and we know how to manage risk.
Because we understand the space very very well.
So so far so good so we will continue to do.
Wow.
What we need to do in terms of managing to overall risk profile of this U.S. China relationship.
And move accordingly in a prudent manner, so I P I feel pretty comfortable with that.
We were able to find a way to keep doing well.
And that is something that I have plenty of discussion with our board of directors in regarding with the situation again, I I think that.
Since Nixon's.
Normalized relationship with China, and U.S. government policies have always been see common ground.
And reverse reserving differences.
That's been the policy for two decades and the last few months have been quite differently, but I don't think that there's a sort of like very very a hostile type of relationship can sustain and at some point of time I in my long term view.
It will normalize again, and then things we'll get there.
Thank you. The next question comes from Chris Mcgratty KBW. Please go ahead.
[noise] great. Thanks for the question Dominican in your prepared remarks, you you spoke of the consistency of your efficiency ratio in the high Thirtys understanding weren't a different world with interest rates, maybe you could talk about your expectations for this metric going forward.
Oh, I, maybe speak of it excluding the <unk>.
The impact of the Triple B program. Thank you.
[noise] [noise] well [laughter].
Efficiency I mean, I think I said it before efficiency ratio is just say I'm so sorry the.
Revenue of income minus expenses [laughter] not much to it I, just basically walk with our.
Our associate and then I tell them that hey.
Ill.
I wish I mean.
Don't take any losses, but then book as many long sets you can and then bringing all these good low cost deposit.
And so that you know generates some meaningful problem like Uh huh.
Net interest income and then you know.
Good morning.
The income core fee income.
And then controlled expenses and then something good will come out and then my definition of something could come out is that these.
Hi, Toadies, Oh, Fortys kinda numbers.
And that's it that's all that's all we that's what we focus on you know and then I don't really really get into that much about a we'd have a target anything like that I. Just you know we just make sure we do the right thing.
[noise] understood great maybe a good that's one more on the expenses you guys have I think done a great job adjusting to the revenue environment by slowing the expense growth.
I guess Twoq two part question the lower expenses the core expenses. This quarter was there any benefit from the the Triple P. program the originations.
And to how do we think about just investments in this in this kind of environment the pace of investments into 21. Thank you.
[noise] persist as Irene I'll take that.
Yes, there was a benefit during the corner of for a low cost that were deferred arcos fees are roughly a.
50 million and in the corner deferred to about 7 million of a them a.
Loan costs fees associated with the origination the PPP loans on a go forward basis.
If you look at the pace of investment.
We have yeah actually many very exciting investment and project underway to help our customers you know improving our systems our platforms. The digital Onboarding those investments started before the path.
And then that there are underway you know just to share a well underway rather I'm aware implementing the new online banking system for Hong Kong and that will integrate our U.S. online banking and our Hong Kong long time banking or also I'm, finding a new global after that system and we also have many small.
All our projects underway to improve digital Onboarding, and then process as I think with the pen down that you know the investments that we had been in continue to make in these areas are perhaps maybe even more important so into certain nics that these are things that we're continuing to do have started the.
For and we'll continue to do and in a way you know many of these will also help us as far as the efficiency and the productivity of our team and our ability to continue to serving customers without adding on as much incremental cost.
Thank you. The next question comes from lot of Chan of BMO capital markets. Please go ahead.
Thanks, I'm just two questions one isn't yet eight R&D tax credit investments and Dsos associates actually going forward.
Updates there is no update.
If you're asking what the amortization that tax credit will be in for the full year, we are assuming around 100 million sorry.
Oh, no tax credits with a tax rate amortization.
Against those 100.
Got it thank you and it anyway, you can quantify if they can't though this quarter how much of that.
But the change in economic forecast versus learned downgrades and new loan growth.
Yeah, Great question.
First and foremost I would say the vast majority of that kind of you know that a lot of moving parts with the allowance, but the vast majority of the increase had to do with the more adverse economic scenario secondarily I would say, it's a downgrades, particularly for cnine.
Next question comes from Dave Rochester.
Please go ahead.
Hey, good morning, guys.
Good morning.
On the credit slide on slide 14, you're showing classified and special mention and see an eye ex energy and PBP going down this quarter in terms of the ratio versus last quarter.
It was just looking for some color there it was that the P.P.P. effect shoring up customer balance sheets or something else going on just.
Well color there would be great.
Yeah, it's definitely not the PPP, what we had in the quarter over quarter there were some loans.
That were resolved during the corner that were classified last quarter.
Got it.
And then for my second question you guys had mentioned pipelines were building in June and commercial.
And you mentioned a few industries. There was just wondering if you just talk about what's driving that build if you're taking share in those areas or if you're hearing more confidence or a any positive sentiment amongst a commercial customers and then I guess you on the flip side and the rest of the see an eye book is the expectation that you'll have some more paydowns in energy and maybe see an unwind of some.
Of those draws from from the first quarter of as we go through the back half of this year.
Okay for the pipeline.
That we are beginning to see in June in fact, we start booking some of these loans now in July.
And.
P. No private equity are those are just traditional capital call lines and.
[laughter] mainly existing customers.
Half new funds you knows so much distressed situation go around that at the to the well you know that more people now I mean, just like up putting in substantial amount of quotidian start new funds to capitalize on these opportunities.
And we have these very very strong.
Borrowers that stuff, starting new funds coming to us and Uh huh.
We are able to actually start booking some of these private equity capital call lines business I would just have happened to be picking up some more.
I think for the last few weeks horses or indeed.
Second quarter, when people need to adjust time out and size up what's going on.
And on the entertainment side.
I think our team just being very diligent.
[music].
Well I'll stay at home, but Darling does does the phone non stop with the studio executives and then getting these skills that that we're able to finance and against very strong.
Oh collateral you know support type of deals and and things that the we sort of like without any question to be more than happy to jump into it just kind of.
Type of transaction.
And even doing depend damage. So we feel very good about it you know these kind of opportunities.
And the third category that I thought we saw something the nice pickup a cross border business.
Keep in mind that in the.
First and second quarter, you know Hong Kong and China.
Have taken a more draconian type of.
Measurement against.
In terms of does I would say discipline.
On a fighting to pandemic.
Both of them have been extraordinarily successful.
But with that I think that obviously person has been somewhat shutdown in the back way so they wouldn't having as much business as few as we indicated in the second quarter.
Oh.
No second quarter, we actually have $2 million you know.
So 2% reduction our greater China loan portfolio.
But there started you know getting back you know business as usual business as normal both in Hong Kong in China.
So our teams in greater China are picking up some more business, we feel that there's more opportunity there.
And same thing for the cross border team in United States.
Frankly when everybody.
Look at U.S., China, as something that they don't want to get anywhere close to.
If someone just look very hard and deep they can always find some golden opportunity in there and we're trying to make sure that we.
Do the best we can to capitalize on some of these remaining good opportunity. So at this point, we see these three a second industry verticals.
They have some pretty good traction for now I mean, but still well in July in its too early so.
We don't know what the next two months would be like we'll see but at this point it looks pretty promising.
[noise], what's the next question.
The next question comes from <unk>, Davidson or any of Wedbush Securities. Please go ahead.
Hi, Thanks first question is on a credit and the provision you mentioned about how it could be lower if the macro environment remained stable I was curious if the stimulus bill being contemplated is delayed too late August or September would that change your economic forecasts.
Oh, no. It's just the stimulus bill being delayed would change the economic forecasts certainly if that impacts the expectation you know a lot on drivers for our forecast some of the up there many drivers but for US if you look at it.
GDP growth.
Unemployment and then to certain extent you know for single family. The housing starts numbers. So those are the things that drive at the most but certainly I would say that if.
On the bills are delayed and that impacts.
The expectation around these key metrics that what how the impact.
But not just by itself.
Okay, Thanks for that and separately.
Anecdotally it appears more retail stores are becoming vacant I was curious do you know how much of your CRT borrowers no longer have tenants.
Well, we actually went through these CRB Oh, we tell.
Customer as long, we view as I said, you know we view over 50% off these CR you long casino in the loan by loan review basis and on getting the most current information.
No relationship manager actually I'll have to most updated information for the customers. You know every one of them have a maybe a little bit unique situation, we have some that.
I have maybe 30% of the tenants I have it have to cannot pay full rent and we have some that actually have a few of the tenant just say that I'm out you know.
And then the where others that are still paying as agreed fully occupied so every one of them a bit different for a few of them that may have some.
More severely Dave in terms of Tenda, not pay or you know somehow the borrowers have strong financial ability to continue to carry the payment and knowing that eventually he will be able to find a way to release it to some some other new tenants down the ROE so it.
Yes, sorry, automotive fun scenario, but one thing we do know.
Is that because we went through these review known by long, we know exactly what the situation is and we know what distressed situation.
As currently at at this stage, we feel pretty good uncomfortable about.
The portfolio.
Where stand today.
And we feel that we absolutely from by CRD point of view, we have more than adequate reserve to cover any potential losses.
I'd also just like to add you know I'm a lot of the common stock made were about tenant and their payments and.
Especially given in light that many of the stores are close.
Specifically as it relates to occupancy.
The buildings and those of you know as we went through these loan reviews, a the occupancy a pre pandemic was pretty high almost in the properties most of them more fully occupied.
Thank you next question comes from Brock Vandervliet.
Please go ahead.
Oh thanks.
Yeah and accounting.
Question here I noticed.
There was a.
Negative provision in single family residential.
In the quarter could you.
Give some color on that please.
Yeah, the slight negative provision in.
Single family you know, it's very modest in many ways, but the resolved. The reason for that was the allowance that was required did reduce slightly.
From the forecast that we used at the end of March to our forecast as of.
The end of June that we use for our June allowance close.
It was really driven by the less severe impact for housing prices, what the H.P.I. improving over the prior forecasts.
Got it okay.
Okay and.
I understand correctly that the next.
Major cliff of.
Deferral Expirees is August.
Yeah.
Based on.
Yeah, So I'll I'll categorize the deferrals, we know we have the big groups as far as the commercial default and then also the single family single family a little earlier.
For the commercial deferrals. It is August and September most of those will come up in a way then.
Thank you. This does conclude our question and answer session I would like to turn the conference call back over to Dominic for any closing remarks.
So again, thank you all for joining us for the car and now we are we looking for speaking to all of you again a in October thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.