Q3 2020 East West Bancorp Inc Earnings Call
Good day and welcome to the East West Bank Corp, third quarter 2020 earnings call.
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I'd now like to turn the conference over to Julianna Balicka. Please go ahead.
Thank you Sarah good morning, and thank you everyone for joining us to review the financial results of East West Bancorp.
Third quarter Twentytwenty with me on this conference call today are Dominic.
Chairman and Chief Executive Officer, and Irene Oh, our Chief Financial Officer.
I would like to caution you that during the course of the call management may make projections and other forward looking statements regarding events or future financial performance of the company within the meaning of the Safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Forward looking statements may differ materially from actual results due to a number of risks and uncertainties for a more detailed description of risk factors that could affect the company's operating results.
Please refer to our filings with the Securities and Exchange Commission, including our annual report on form 10-K for the year ended December 31st 2019.
In addition, some of the numbers reference on this call pertain to adjusted numbers. Please refer to our third quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures doing that.
During the course of this call we will be referencing a slide deck that is available as part of the webcast and on the Investor Relations site.
As a reminder, today's call is being recorded.
It will be available in replay format on our Investor Relations website, I will now turn the call over to Dominic.
Sure Julianna good morning.
Thank you everyone for joining us for <unk> third quarter 2020 earnings call.
I will begin with a review of our financial condition and results.
On slide three of this cousin tissue.
This morning, we recorded we reported third quarter 2014, net income 160 million.
Our daughter 12 cents per share.
61% from second quarter net income of 99 million.
Oh 70 cents per share.
Oh, so core return on average assets was 1.26%.
Return on average equity was 12.5%.
And return on average tangible equity was 13.9%.
Oh profitability rebounded from the trial.
Off the second quarter after.
That's provision for credit losses declined.
Deposit growth this quarter is very healthy.
But especially strong growth in non interest bearing demand accounts, which grew 28% annualized quarter over quarter based on period end balances.
And 22% annualized based on average balances.
As of September 30.
We have reached a record 41.7 billion in deposits.
Including a record 14.9 billion in demand deposit accounts.
We generate a positive loan growth.
Also in the third quarter.
Reaching a record.
37.4 billion in loans as of September 32000, Teus. This.
Despite a challenging backdrop.
Slow economic activity due to the cold at 19 pandemic.
The biggest driver for the quarter over quarter increases in net income.
Reduction in the provision for credit losses.
Which was 10 million in the third quarter compared to 102 million in the second quarter.
In the first half of the year, we recorded.
176 million in provision for credit losses coming.
Compared to net charge offs of 20 million or so.
Substantially building our research.
Based on an improved macro economic outlook, we modestly decrease call. It allows the losses.
As of September 30.
Overall credit continues to be very manageable as Dom.
As demonstrated by net charge offs annualized 26 basis point of average loans.
Also in the third quarter.
We earned 219 million pretax pre provision income on.
Total revenue of 374 million.
Our pretax pre provision profitability ratio was.
1.74%.
The steep decline in interest rates this year has impacted our revenue.
However.
As the downward repricing of our earning assets to benchmark rate is largely complete.
And we continue to reduce the cost of funds that's maturing Cds reprice no.
We anticipate that our pretax pre provision income and profitability will stabilize going forward.
Importantly, how efficient see remained industry leading.
The key variable to maintaining above average pretax pre provision profitability.
Hi, fishing see ratio in the third quarter was 41.3%.
Moving to slide four for a summary review of our balance sheet.
Our balance sheet is strong.
We have high levels of liquidity and capital and as of September 32020.
We crossed over the 50.
50 billion in assets milestone.
Ending the quarter at 50.4 days.
This translates to an organic compound annual growth rate of 10% over the past five years.
Quarter over quarter.
Total loans of 37.4 billion increased to.
208 million or 2% linked quarter annualized total deposit of 41.7 billion increase 1 billion or 10% annualized.
Our deposit growth combination.
Onboarding new clients.
Expanding existing relationships and.
And our clients maintain at high levels of liquidity.
We believe the momentum of strong deposit growth can be sustained pose condemning.
Due to our deposit growth this quarter a loan to deposit ratio as of September 30 was 89.8% compared to 91.5% as of June 30.
Now turning to slide five you can see that east West capital ratios are strong and growing.
I know some of the highest amount region regional banks, particularly for common tier one equity.
Our book value and tangible equity per share both up 3% from the prior quarter.
Tangible equity to tangible assets ratio increased to 9.3%.
You can see from the chart that all our capital ratios increased quarter over quarter.
East West Board of Directors has declared a fourth quarter 2020 dividends for the company's common stock.
Common stock cash dividend of 27.5 cents is payable on November 16 2020.
Stockholders of record on November 2nd 2020.
Moving onto a discussion about loan portfolio, beginning with slide six.
They are not alone excluding PPP work.
Were 11.5 billion as of September 30, or 31% of total loans.
Total C.N.I. commitments, excluding P.P.P. were 16.3 billion as of September 30, a core.
Quarter over quarter increase 5% annualized.
Month over month growth of loans outstanding.
Turned positive in September we were.
Reversing a trend of negative monthly growth since March.
Oh, yes.
C N Islands outstanding excluding PDP decreased by 844 million between June 30, and September 30.
A decrease of 5% annualized compared to a decrease of 29% annualized in the second quarter.
Moving to slide seven.
At September 30, our total commercial real estate portfolio was 14.7 billion or 39% of total loans.
Total commercial real estate loans grew 171 million or 5% annualized from June 30.
The portfolio is well balanced across the major property types of retail multifamily office industrial and hotel.
Our exposure to construction and land loan remained low at 1.5% of total.
You can see on slide eight that.
At the weighted average loan to value about total commercial real estate portfolio is.
51%.
The average loan size of only 2.4 million.
Nearly 90% of our commercial real estate loans have an LTV of 65% alone.
In the chart on the right you can.
You can see that the weighted average loan to values of loans by property type.
Range from 49% to 53%.
On slide nine and 10.
We provide additional details regarding our single family residential loans.
And home equity line.
Combined yes.
Residential mortgage and other consumables pick up 25% of our total loans.
As of September 30.
Single family residential portfolio work.
7.8 billion.
Oh, Hi, hundred 26 million or 7% annualized from June 30.
In the third quarter, we originated 768 million residential mortgage loans can.
Consistent with the pace from the first half of 2012.
And up by 19% year over year from the third quarter of last year.
We expect a similar pace of origination for the fourth quarter.
The average loan size in our residential mortgage portfolio is only 386000.
The weighted average loan to value is 53% [noise].
Again.
90% of our residential mortgage loans.
And LTV loan to value.
60% or less.
[noise] onto slide 10.
[noise] September 30, we had 1.5 billion a home equity line outstanding.
But [noise].
1.6 billion and dispersed commitments trends.
Translating into a utilization rate of 88%.
Unchanged from last quarter.
Oh equity lines outstanding increased 52 million quarter over quarter or 14% annualized.
And total commitments increased.
1% annualized.
The average size of our home equity commitment is three.
367000.
The weighted average combined LTV is only.
48%.
97% of our home equity.
Half, an LTV loan to value of under 60%.
I will now turn the call over to I read for a more detailed discussion of our asset quality.
Thank you Dominic I'll start by discussing love uncovered 19 related deferrals on slide 11 as of.
As of October 20th loans on full payment deferral or 1.9% of total loans.
Loans on partial payment Carl [laughter] only one.
Suddenly were modifications of principal and interest payment to interest only loans on deferral totaled 3.4% overall, 55% of commercial loans under Pharrell are still making partial payments quote.
Quarter over quarter loans on Tobin 19 related defer all decrease close to 50% between June Thirtyth September Thirtyth and decreased a further 20% bump to date in October the largest improvement wasn't residential mortgage deferrals, which decreased by.
79% since June thirtyth, reflecting the resiliency of east West customer base.
Similar to the second quarter, the deferral rate on C.N.I. loans continue to be very low cost.
Commercial real estate loans on deferral have also decreased down to 6.6% as of October 20, it comprised of 3.8% I'm partial payments and 2.8%.
Full payment deferral, largely reflecting the longer a club in 19 impact on cash flows for certain properties.
Turning to slide 12 for a view of our allowance for loan losses, and slide 13 for a review of our other asset quality metrics are.
Our allowance for loan losses was 618 million as of September Thirtyth.
Our 1.65 per cent of loans held for investment modestly down from 632 million or 1.7% of loans as of June 30 at.
Since January 1st post Cecil.
Our allowance increased 135 million and the coverage ratio increased by 26 basis points from 139. The current macroeconomic forecast has improved projecting less severe economic conditions compared to June thirtyth.
This in turn decrease the expected lifetime losses for the loan portfolio.
The forecast driven reduction to the allowance was partially offset by increased qualitative reserves well.
Oil and gas and commercial real estate loans, the allowance coverage of our oil and gas portfolio was 10% as of September Thirtyth upper 9% as of June Thirtyth.
Net charge offs for the second quarter were just under 25 million and net charge off ratio was 26 basis points of average loans analyzed.
Charge offs in the third quarter were primarily from oil and gas loans, which accounted for 22 million or 91% of net charge offs, while charge offs from other loan classes remain at low cost.
Reflecting these drivers and assumptions, we recorded a 10 million provision for credit losses during the third quarter of 2020 compared to 102 million in the second quarter.
Turning to slide 13 on this page we detail out the component of criticized assets.
Criticized loans were 3.9% of total loans as of September Thirtyth totaling 1.5, Dugan, the largest concentration within criticize loans by the industry or property type remained oil and gas although criticized see an i. loans are diversified by industry and the criticized commercial real estate loans are like.
Weis largely diversified by property type.
Special mentioned loans were 1.9% of total as of September Thirtyth.
The amount of 723 million up from 1.5% of total loans.
June Thirtyth, an increase of 26% the quarter over quarter increase in special mention loans was largely due to inflows from commercial real estate.
As of September 30 at 10.5% of oil and gas loans, 2.8% of all other see an island and 2.1% of commercial real estate loans are graded special mention.
Classified loans were 2% of total loans as of September 30, it in the amount of 758 million compared to 1.8% as of June Thirtyth, an increase of 11% a quarter over quarter increase in classified loans was largely driven by downgrades of oil and gas loans followed by downgrades.
All other C N islands.
As of September Thirtyth, 23.5% of oil and gas loans, 2% of all other cnine and 1.6% of commercial real estate loans for classified.
Nonperforming assets were 52 basis points of total assets as of September Thirtyth, and the amount of 260 million compared to 41 basis points as of June Thirtyth, an increase of 29% the quarter over quarter increase in nonperforming assets was primarily due to net inflows a previously classified all in glass.
Loans to nonaccrual status.
Lastly, accruing loans 30 to 89 days past due were 85 million or 23 basis point of total loans as of September thirtyth it quarter over quarter improvement of 25% from 113 million or 30 basis points of total loans as of June thirtyth.
As you can see in our credit quality metrics outside of oil and gas asset quality is thing across our other loan portfolios.
In terms of oil and gas I'd like to note that we can use to reduce our exposures to pay downs workouts and startups oil and gas loans outstanding are down 8% quarter over quarter and down 12% year to date, including on disbursed commitment.
Total oil and gas commitments are down 8% quarter over quarter and down 17% year to date and.
In terms of hedges in place for MP borrowers there.
52% of their plan 2021 oil production is hedged at 59% of their plan 2021 gas production is hedged and now.
And now moving to a discussion of our income statement on page 14.
This slide summarizes the key line items of the income statement, which I will discuss in more detail on the following slides and.
Amortization of tax credit and other investments was 12 million in the third quarter compared to 25 million in the second quarter the quarter over quarter change reflects timing of tax credit investments and we expect this number to be approximately 20 million in the fourth quarter, yes.
The effective tax rate for the third quarter was 19% up from 12% in the second quarter of 2020, the quarter over quarter increase in the tax rate reflects the increase in pre tax income third quarter income before taxes was 196 million a 75% increase from 112 million in the second.
One quarter as we increased our estimate for the full year effective tax rate to 15%, 19% effective tax rate for the third quarter included a true up to the higher full year effective tax rate the effective tax rate in the fourth quarter should be close to the full year effective tax rate of 15%.
I'll now review the key drivers of our net interest income and interest margin on slides 15 to 18, starting with average balance sheet growth there.
Third quarter average balance third.
Third quarter average loans of 37.2 billion grew quarter over quarter growth in commercial real estate residential mortgage and PBP loans was offset by a decrease in C and I lungs.
Quarter average deposits of 41.2 billion, 13% linked quarter annualized driven by strong growth in demand and checking accounts offset by a reduction in high cost time deposits average noninterest bearing deposit accounts grew 22% linked quarter annualized and made up 35.
As a percent of total deposits in the third quarter up from 34% in the second quarter and 29% in the year ago quarter.
With the strong deposit growth in excess of loan growth the average loan to deposit ratio decreased to 90% in the third quarter down from 93% in the second quarter, excluding PPP loans, where we matched funded 75% with the P.P.L. that the average loan to deposit ratio was 86.
A sand in the third quarter.
Accordingly average interest bearing cash and deposits with banks increased by 1.5 billion in the third quarter and made up 10% of average earning assets up from 8% in the second quarter. This growth on lower yielding assets was a headwind to the net interest margin. This quarter, we continued to deploy excess liquidity.
Until available for sale securities, but given the low interest rate and a flat curve attractive opportunities are limited.
In the current environment, we are comfortable managing the balance sheet with a higher level of quickly I recognize that when loan growth accelerates as it is starting to this headwind to the net interest margin will largely self care.
On Slide 16, you can see that third quarter 2020, net interest income of 324 million decreased by 20 million or 6% linked quarter and the net interest margin of 270 to compress by 32 basis points from the prior quarter. However, excluding the impact.
PDP loans and the P. Pls third quarter adjusted net interest income of 318 million declined by 2% or 5 million quarter over quarter exhibiting relative stability third quarter. Adjusted net interest margin of 277 compressed by 19 basis points.
From second quarter.
PBP loan interest and deferred fee income was 6.5 million in the third quarter down from 21 million in the second quarter the quarter over quarter fluctuation is due to changes we made to our estimate for expected forget Miss a PPP loans by the S.P.A., resulting in reduced.
Deferred fee.
Accretion for the third quarter the quarter over quarter change and net interest margin breaks down as follows.
14 basis points from lower loan yields negative six basis points from lower other earning asset yield negative 12 basis points from excess liquidity with higher balances of interest bearing cash and deposits with banks as well.
As well as a negative 13 basis points of impact negative impact from last TPP income, partially offset by 12 basis points from a lower cost of deposits and one basis point from a lower cost of borrowings headwinds.
And once and then have then deposit growth in excess of loan growth a lack of attractive redeployment yields for excess liquidity, but we see several tailwinds that should improve the NIM and net interest income going forward for the fourth quarter of 2020, we anticipate that our GAAP net interest income.
Well grow by 3% to 5% and that our GAAP net interest margin will range from 275 to 285, including PPP income the drivers for our net interest income and then outlook are as follows.
First continued reduction in deposit costs from the repricing of maturing Cds, We had 1.4 billion in Cds at a weighted average interest rate of 145 maturing in the fourth quarter and another 1.3 billion and a weighted average interest rate of 126 in Q1 of 2021 so.
And partial repayment of the P. P. P. OLED ahead of P.P.P. loan forgiveness for our customers a process that we have already begun month to date in October we repaid 524 million also we expect to recognize 15 million a PPP loan deferred fee and interest income in the fourth quarter.
And thirdly general stability for loan yield as downward repricing of variable rate loans has largely run its course.
Now turning to slide 17 third quarter average loan yields are threesixty contracted by 30 basis points from last quarter, reflecting downward repricing of variable rate loans to benchmark interest rates as well as the reduced fee income exceeded on PPP loans.
Excluding the impact of PPP, the third quarter adjusted loan yield of 370 contracted by 20 basis points quarter over quarter.
And the second quarter.
The quarter over quarter contraction and the average loan yield excluding the impact of.
Ppt was 81 basis points.
65% of East West loan portfolio is variable rate and by now these loans have largely repriced nearly 90% of variable rate loans. We have are linked to benchmark interest rates, what the duration of three months or less.
And the upper right quadrant, we've laid out a new chart showing our average loan yields by portfolio as you can see our single family residential mortgage product is a lease rate sensitive portfolio continues to carry attractive deals to organically reduce asset sensitivity, we have been growing fixed rate loans, notably in single family.
Year over year fixed rate loans, excluding PDP PV increased by 30%.
Turning to slide 18 against the backdrop of materially lower interest rate declines in earning asset yields have been partially offset by decreases in the cost of funds.
Our average cost of deposits for the third quarter dropped to 33 basis points down from 47 basis points in the second quarter, an improvement of 14 basis point the spot rate of total deposits as of September Thirtyth was 29 basis points are.
Our third quarter average cost of interest bearing deposits dropped to 50 basis points down from 71 basis points in the second quarter, an improvement of 19 basis points the spot.
The spot rate of interest bearing deposits as of September 30, It was 46 basis points.
In the lower left quadrant, we present, our third quarter 2020 cost of deposit by deposit category compared to the cost of deposits in the third quarter of 2015, which was the last full quarter under a zero interest rate policy before the fed raised rates in December 2015 at that time.
On the average cost of deposits was 20 basis points and the average cost of interest bearing deposits what 40 basis points. We included this chart in the deck as we believe it provides additional context on the repricing lever within our cost of deposits you can clearly see that our CD book has not fully repriced down.
Two historic Zurich levels, we expect.
We expect to continue to reduce our average cost of Cds maturing Cds over the next six months, we pay slower bringing the total cost of deposits down further the rate paid on originations or renewal I've done.
Our domestic Cds in the third quarter 2020 was 43 basis points and the retention rate a branch Cds has been an excellent 92% quarter to date rates paid on RCD originations and renewals have been lower than in the third quarter also as of yesterday the spot rate for us.
Interest bearing deposits is down to 42 basis point, if our total cost of deposits, it's down 27 basis points.
Moving onto fee income on slide 19, total noninterest income in the third quarter was 50 million compared to 59 million in the second quarter fee income and net gains on sales of loans was 48 million in the third quarter were down by 4 million, 8% quarter over quarter.
Landing fees.
19 million decreased by 3 million largely reflecting valuation changes for once received as part of lending relationships third quarter lending fees included 4 million from the increase in the valuation of warrants in comparison second quarter included 8 million from the increase in the valuation of watch include.
Included in lending these are customer driven letters of credit fees, which increased quarter over quarter in parallel with increased customer activity.
Reflecting an increase in the number of customer accounts and customer driven transactions deposit account fees and wealth management, the increase quarter over quarter four.
Foreign exchange fees decreased quarter over quarter.
Due to downward revaluation of FX denominated balance sheet items, partially offset by an increase in customer driven transactions moving.
Moving on to slide 20.
Third quarter non interest expense was 168 million a decrease of 11% linked quarter.
Sporting amortization of tax credits and other investments.
Core deposit intangible amortization adjusted noninterest expense was 154 million in the third quarter, an increase of only 1% quarter over quarter and a decrease of 3% year over year.
I would also note that excluding the impact of PPP loan origination cost deferred in the second quarter third quarter compensation expense of 100 million decreased 4% quarter over quarter from 100 unemployment ended the second quarter and the second quarter. So.
7 million of compensation expense associated with PDP loan originations was different.
The quarter over quarter increase in computer software expense reflects amortization of previously capitalized investment spend.
Our third quarter adjusted efficiency ratio was 41.3% over the past five quarters, our efficiency ratio has ranged from 37 spot 7% to 41.3% as an organization we remain committed to controlling expenses across the board in order to support our strong profit.
With that I will now turn the call back to Dominic closing remarks.
Thank you Irene well.
In summary.
Our net interest margin is stabilizing.
Rove is positive.
We remain disciplined about efficiency.
And credit remains manageable.
Business activity for our customers picking up and we're looking forward to helping them rebuilt and expand into the future.
Sure I would like to thank all of our associates for the dedication during this.
During these unprecedented times.
And wish everyone continued good health I would.
I would now open up the call to questions operator.
Thank you we will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
[noise] [noise]. Our first question comes from Ebrahim Poonawala with.
Bank of America. Please go ahead.
Good morning.
Good morning, everyone I'm wondering if.
If we could just start victoza credit Oh.
Well, Nick when you look at the progress.
When you look at the provisioning level I think assuming that the macro doesn't deteriorate from here just talk to us in terms of your comfort around the portfolio Oh, well one like what what do you expect for the rest of the deferrals that are still outstanding as we get towards the end of the year what percentage of those do you expect to go into non accrual losses.
I'll go back to paying and what have you learned about the portfolio in the last six months to to give us comfort that you're not going to have negative credit surprises in oneq when you work.
Well, we've been actually.
Actually are looking at.
Looking at our.
Credit portfolio, you know sector by sector.
And in the <unk>, but then to see a nice also in commercial real estate you know in the Cnine with all the different industry verticals each each vertical got review loan by loan.
She already you know we break it down by you know what as hotel office building multifamily and region by region.
And obviously our single family mortgage is how do you have any problem and has always been for for many years. So we've done all of that kind of the view and we as of today I feel pretty good about where we are today, we think we serve.
This is definitely adequate you know and in terms of our risk.
Risk rating classification, and so forth you know and we feel that we are very much current in terms of the classification from.
From the deferral point of view as you can see from June 30 to September 30, an automated even we show the deferral Esso two days ago.
Continue to show Great progress.
And we at this point do not see a lot of.
Concern about surprises.
Got it and just in terms of capitalizing Dominic you mentioned on C.D. want even intangible equity you have one of the stronger capital levels.
We're conservative coming into the cycle not buying back stock just talk to us in terms of how you think about capital allocation, maybe not the next couple of months, but as we look into the first half of next year and your Oh, I I guess, a desire to buy back stock or if it stays where it is.
[music].
Well we have a.
What meetings every two two months of two and half months or so so this is always like I would say that a standing agenda.
So we update the information financial condition and balance sheet and then also the main needed.
Economic outlook would the board members and with those information we are deliberate and then we have discussion of whether we should take any any kind of action. So at this stage right now I would say that.
This that you know and we're doing that pandemic environment, we are not going to be looking into buying back stock.
On the other hand, you know comes 2021 things can change dramatically in terms of economic outlook and then we will do whatever is right accordingly in the base on the circumstances at that point.
Our next question comes from Ken therapy with Morgan Stanley. Please go ahead.
All right great. Thanks.
I guess, maybe just looking for a little more detail on the NPK increase I know you said it was driven by oil and gas I guess you know the concerns that we would have is does you know.
Does it continue right I mean, obviously you still have a sizable portfolio is running off it but.
But is the worries he does it continue and slashed do you have to build reserves for.
The additional portfolio as it deteriorates. Thanks.
Yeah, Ken that's a great question and I when we look at the increase in non accrual loans and also charge offs, you know really over the course of last year.
And beyond that really you know a lot of that has come from the oil and gas portfolio and we have also increased the reserves you know, let's say quarter over quarter, 9% to 10%. So when I look at it from the perspective of where the loss content is I do think it's still in our portfolio in oil and gas a I would say though.
So when these loans were previously classified they are identified and one thing that is positive is that we're not seeing ongoing kind of downward deterioration into classified assets.
Yeah, I would say you can't I mean, just maybe add onto what Irene just sure it that way.
Would there be any likelihood of an name.
More potential charge offs losses from the oil and gas portfolio.
Definitely there was that probability the difference is that we feel very confident because we only have so many loans and only gas portfolio and its during going down and there are just so many loans in there.
And we have looked at every one of them and we continue to classify them in the <unk> and the right.
And the right bucket.
And the macroeconomic condition as of today.
It's actually more positive than a few months ago. We all recall you know back in late March and early April.
The crude oil prices you know just dropped to a level that is unheard of but it's been pretty much stabilized at that $40 per barrel and then that the gas price actually have gone up quite nicely.
So and then keep in mind also that our portfolio has Irene shared earlier I mean substantial percentage of these loans.
Approximately hedged.
Even going into 2021.
So it's not like you know these are the loans that on a daily basis. They are going one by one going at your trouble I think what we experience in terms of the charge off.
Somewhat relative to peers in that industry.
Everyone cat or the like.
Like from the oil and gas.
Business. So from my perspective is that.
This is a portfolio that.
That is getting smaller and smaller and we have substantial reserve provide for it and we feel confident that we can manage that and in addition to it you know we have plenty of profit.
Profit and income to offset against these losses and still come up with a decent return of equity and return of assets.
Yes. It is a long term plan just to keep running it off because I guess, it's it's just hard for us to see how their how this segment generates positive risk adjusted returns given every few years. It almost feels like there's a problem at Wassa Spike I'm talking positive risk adjusted returns over like a multi year period.
We are we are managing it down and then we started managing it down since last year and then we can see the matching downtime, but you know the environment keep changing who knows what's what's going to happen you know from that.
The demand around the world on United States, or even a technology technological advancement that changed the dynamic there.
We have no ability to project.
I mean as a bank with we basically facilitate you know financing.
Oh It was a very very focus of risk management. If we feel that this is going to be an industry. You know going forward you know that we can manage the risk very effectively there.
There is no reason why we're not into this segment I think it's all get back down to we will be always very prudent to watch what's going on in the future and do the right thing accordingly.
Our next question comes from Jared Shaw with Wells Fargo. Please go ahead.
Hi, good morning.
Good morning, Gary.
Looking at at the expense side and the efficiency side do you think.
Given the the the broader low rate environment.
We can get back to a sub 40% efficiency ratio or will that really depend on you know see.
Seeing some some broader.
Rate improvement or is there anything you can do on the expense side to help help.
Help accelerate that.
Yeah, John I'll take that call. A question you know I think and the largest variable for that would be on the revenue side. You know as we talked about earlier in our prepared remarks, we do feel strongly fourth quarter and beyond that that revenue net interest margin and I will increase you know I think we.
Have a long history of proven ability to control the expenses and that's something that we feel confident in this type of them.
That will be able to continue to do so while still making the appropriate investments that we need to do support our growing business.
Okay.
Thanks, and then shifting a little bit to that to the Sia or your portfolio and the growth you saw this quarter.
Yeah, I guess, how much of that was refining you know I guess somebody else's loan and.
Gives you yeah, hi, how are you getting comfort putting on new Siri product now and is that translating into better terms and conditions and pricing or I guess, maybe maybe your thoughts around.
Where are you seeing a doing under serious side.
Oh in terms of we see all the loans that we originated you know most of the I mean, almost all of them are with customers that we've been doing business for a long time add.
And these are customers have very strong financial and balance sheet.
And that we feel comfortable and then obviously these are the properties that are less impacted net.
Negatively by depending and that's what we are.
You know originated this new long some of them are not revise some of them are just are also taking shares from other banks and so [noise].
The pricing is getting better than slightly better than.
It was I would say no six nine months ago. Obviously see are you pricing was extremely competitive last year, that's no longer a competitive. So we will be I would say that originating C are you done with a slightly better pricing going forward in terms of volume of Cie loans I would think.
That in 2021, and we probably may not have as.
Nice of a robust growth of CRB origination like we did in 2019. So you would expect that 2021 the growth rate will be.
Tempered somewhat because of the.
The lack of no great quality asset.
It'd be financed but we will continue to look and I know I looked at it is that is was this up.
Not a giant institutions is not that difficult for us to keep looking and finding gems.
Hi, there around the bushes and.
And then just make up enough to.
To show positive growth rate.
Our next question comes from Chris Mcgratty with KBW. Please go ahead.
Great. Thanks for the question I want to ask about everyone's favorite topic in taxes, given given the market's expectation that there could be a tax rate increase next year.
Could you walk us through the potential sensitivity I'm on the tax line and also the amortization line given that you guys have been a little bit more proactive in managing your your taxes over the years.
[noise] Yeah, Chris So when we look at the changes that might happen from a corporate tax rate at 21% to 27 of that at this point in time, Although you know there are a lot of moving parts. We think if that happens then pap test will be about 4% on the rest of it what the amortization.
You know once we have this call in January to talk about fourth quarter. We can give you a little bit more details on that along with that if that happens I'll add a at this point in time, we have about 20 million at each case that would reverse as well.
Got it and then assuming this status quo just for modeling purposes. I think you said for the for the fourth quarter amortization of 20 million.
That would bring it to around 75 for the year.
Oh the goal is that about.
Is that the right math for next year, you know, 15% tax rate and 75 or so on the amortization.
Yeah, well talk about that in January.
Got it thanks [noise].
Our next question comes from Dave Rochester, with Compass point. Please go ahead.
Good morning, guys.
Good morning.
On credit you talked about the reserve release, a bit I was just wondering if you could maybe just give a little bit more detail on your comfort level, reducing that reserve on your CR E book at this point.
Well, there's still uncertainty in the economy and how the remaining deferrals in that book, we're going to Pan out.
This quarter, we saw other banks building that reserve.
Reserve in that particular bucket. So just wondering what your thoughts were for this quarter and then if you could talk about how much stimulus stimulus that you have baked into your outlook at this point would be great.
Okay. So if we look at kind of the breakdowns of our allowance you know the amount of reserve that we have set aside for our real estate loan is just over 200 million. So on income producing real estate.
Okay.
And also multifamily so ultimately I would say right now deferrals, what we're seeing in the power for our customers, we're very comfortable with that allowance level, depending on what happens happens when the forecast you know, we'll look and see as far as is a level appropriate for.
Our allowance calculation, we rely on a moody's and the economic forecast there to kind of tailored to our portfolio. We do use a multi scenario approach a baseline now ask one an S. Three because the S. Three is a more severe adverse scenario.
Overall I'll share that the reserve the the quantitative reserve that we set aside is higher than the baseline.
Okay, and then how much stimulus is baked into your overall outlook at this point what are you guys assuming for government additional government stimulus.
Yeah, so in and I think I'll just break it down what the scenarios. The baseline did assume a 1.5 trillion or <unk>. The S. Three assumed on.
So as I mentioned, you know the overall quantitative reserve that we had is higher than the baseline.
Our next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Thanks, Good morning, I want to coach has been answered, but I'm curious on your comments on prepaying. The PPP I think you said.
Probably 24 million month month to date in terms of the liquidity facility how much of that do you expect to.
<unk>.
By year end.
Oh, so a we are paid off the 453, not yet yeah, well evaluate and see it as far as excuse me 423 million well evaluate and see if we'll pay off more I think more than 523 as expected.
Ah depending on how much and the timing of that we'll look and see as far as the liquidity that we have a and then also you know the pace of the forgiveness of the PPP loans, which has started for us.
Okay, and then just in terms of overall balance sheet, you talked about kind of holding some of that liquidity do you have an interest in it.
<unk>.
<unk>.
Do you have any and also continued to grow deposits you propose pandemic at a good pace I'm just wondering what your thoughts are for Oh expectations over overall liquidity flows given the amount of.
Excess funding system right now.
Yeah, I mean, I think that's a great question, especially in this quarter well weve done, especially as you know the deposit flow has continued I think we've gone a little bit more comfortable reinvesting some of that into securities and also with our Securities book I asked that Securities book, we have extended out the duration a little bit so you know I.
Think if you look at the month of September not quarter to date and the average yield in the portfolio. It is up a little bit closer to 2%. If you look at duration you know at 630, we're about two to six and we're at about three eight as of 930.
Our next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Hi, good morning.
Maybe first on on special the increase in special mention acute.
You touched on the fact that the commercial real estate migrated a little bit can you give us maybe some specific examples of.
What migrated this quarter.
[noise], Yeah, Matthew and when we look at kind of the migration into special mention during the quarter. There no. It was you know relate to a certain extent throughout the portfolio I'll share that.
Regardless of whether a customer is on deferral you know, we're making sure that the grading is appropriate if necessarily we are down and these loans. So some of the loans, we downgraded were low.
That were on deferral, but across the board I would say in different kind of asset classes office multifamily and also retail.
Okay, and then just on the deferrals as seen I ex energy has been.
Fairly muted today can you give us a sense for how why that is and you know what your customer.
Customers are.
Saying at this point, whether or not that might increase in the future.
It doesn't look like that at this point in time, you know I think we shared about this last quarter as well you know we did initially as an accommodation for our customers help them with a one month, we called it a skip a pay certainly I think that helped us kind of reach out and how those comp.
Her stations with our customers on the C. and I find a you know I think the reclass and kind of conversations that we've had the request for deferrals and the conversations we've had with our customers around their cash flows has generally been relatively positive.
Okay.
Our next question comes from David Cheever Anyway Wedbush Securities. Please go ahead.
Hi, Thanks, a couple of questions. The first one on loan growth you hit on a couple of the categories are ready about CRT expecting lower growth next year versus versus this year and single family residential you mentioned about you know similar trend going forward, but didn't see an eye if we.
You know exclude PPP what type of growth are you expecting in <unk>.
In that category.
Well for 2021, we do plan to provide guidance.
At the next earnings release, I mean as at this point it will be too early for us to know right in the midst of this oh.
Apco.
Upcoming presidential election with.
You know that mystery about one the vaccine will be available all sort of things are happening right now I just feel that it will be much better for us to have.
The.
Don't.
Growth guidance to provide to you in January and.
And but in the meantime, or I can share as of today is that.
Uh huh.
In the second quarter April May and June.
We spend a lot of time focusing on you know.
You know PPP.
Skip the payment before we just took a lot of time number one thing is to focus on keeping our employees in Greg health.
And thank goodness as of today, you know we didn't really do not have one employee actually went to a hospital for coal at 19.
Yes.
And so oh.
All of US I'm very good Oh, we're going to continue to stay vigilant to keep everyone. Good health. So that we can take care of customers. That's number one thing we focusing on.
And then P. P P kept us very busy.
And why are we doing P.P.P., we also looking into potential deferral and so forth you know some customer just got confused they don't really need they didn't need the deferral. They just thought they have to get ready for it so a lot of conversation going on effective.
So not until sometime in the third quarter.
When these kind of issues all settle.
Our front line relationship managers and branch managers, a start I mean really reaching now and then looking for new business. The good news is that as we highlighted in our.
Uh huh.
Talked earlier that and the latter part of September we start beauty booking some nice cnine loans.
And we start seeing growth in CNS and actually many of these loans that we originated.
A brand new customers.
I think that to a certain degree we're fortunate by being active helping our customers and deepens.
Non customers for PPP or other type of matters.
That banking related.
Cause some of these Uh huh.
There are good prospects to.
Two decided to move their banking relationship.
From Oh.
Thanks for East West [noise], So we're picking up some new business. So that's positive.
The first three weeks of October we also continue to bring in new business.
Some other banks.
And that has been very very helpful for us and we hope this trend will continue.
Now given the fact that we are.
We are still in the midst of pandemic.
They're not going to be a lot of commercial business that are out there recently.
Putting capital investment growth on the other than the one that who happen to be in the business.
That the pandemic help them.
For those who are in some of the traditional business. The pandemic may not help them I think they had utilization rate for their line of credit were probably I continue to say a little bit lower so we do expect that many of the existing customers is going to have a strong push.
To draw down the line dramatically higher to cause a substantial growth there, but we're getting new customers that supplement the growth. So all in all I think at this point, we feel that fourth quarter looking more positive from a C.N. eyesight and by the way, it's not just coming from one particular.
Industry or one particular geographic region is pretty much across the board for East West Bank.
Several industry verticals, even our entertainment business have grown nicely back on digital media business, a cool coming back strong and so our clean energy.
Project Finance.
Those are the type of business are all coming back stronger than before so we hope this trend will continue and in 2021.
But for the detail also providing some sort of a forecast for a growth.
On the lending side.
Well get to the fourth quarter 2021.
January 2001.
Yeah. That's helpful. Thanks for that and then shifting gears to fee income you mentioned about how customer transaction activity increased in the third quarter curious as to what the outlook is for the fourth quarter, if that customer transaction activity, you know that momentum continued into the fourth quarter and we.
I would expect you know either stabilization or rebound just curious as to your thoughts there.
Yeah as you can see the fee income side, you know for customer related.
Customer related banking transaction type of fee income have all picked up.
Picked up so.
If you look at for example, like deposit account fees that has a lot to do it with these new banking relationship that I talked about earlier.
And some of the existing customers expanding their relationship with us that combination of two.
Resulted in us generating even stronger cash management fee income keep in mind, though we talked about for the last few years about investing in that internal infrastructure.
Product enhancement.
Technology improve all of those costs that we put in.
Generating.
No.
Tangible results, our we have a cash management system that.
Hi, Ken.
Not only just accommodate but actually offer.
Greg services to many of the more sophisticated larger size business, who now can just comfortably moved a banking relationship from large banks to east West Bank, because we have the capability to handle that.
Yes cash management needs. So that result in more fee income for us and larger the BD account deposits and we see that trend as very positive.
Is that we are able to do all of that.
Wow a lot of us are still working at home under the condemning.
So what we are looking forward to is to continue to keep pushing.
And.
Both working with existing customer expanding and.
And and deepening.
Banking relationship and also getting new customers on the outside so I looked at from the cash management wealth.
Wealth management.
And even trade finance you know, we have a 9% pickup in terms of business. So all in all I looked at it is that we just.
Then to continue to focusing on making sure that we take good care of our clients and then hopefully we'll get more new business.
Through this a referral from our good clients and so forth and then one step at a time and then getting more meaningful core fee income coming to the bank in 2021.
Our next question comes from Brock <unk> go ahead <unk>.
Vendor bleep that you'd be at please go ahead.
Thanks.
Dominic.
Talk to a lot in the past about the political.
Political environment or at least a bit in the past about it. It's obviously been pretty fraught between the U.S. in China as we look at potentially a by when.
How do you think this could potentially change your your business.
We always sort of like an organization, that's very nimble in terms of Oh.
Adjusting come.
Comfortably was whatever the political environment that is out there.
As you recall in over four years ago.
All the U.S. Oh.
Government policy has been very very much Uh huh.
Wanted to bring in.
Bring in investments from China and also invest.
Investing.
Oh in China, and so forth.
And for the last couple of years, you know due to presidential election election, and the political rhetoric Saturn hostile.
And that have changed the dynamic dramatically.
And we looked at you know even with the trade war in place for the last few years with the terrorists as.
As you have seen so far.
You know, we have such a big trade finance portfolio import export business and then also with greater China exposure.
But at the end of the day, we hardly have any losses.
No the business slow down a bit because we're being more cautious you know temporarily and then also of course because of the pandemic.
Actually China was shut down for a few months and so that had a fat you know the growth aspect, but in terms of from a risk aspect, we managed very well and have almost no losses.
So with that in mind, I will say that looking forward you know.
Joe Biden has made it very clear about his foreign policy.
Which is.
To get back instead of American gold.
Oh loan.
And against a world and.
And Americans going to work with allies, and it's going to take leadership back into.
No United Nation, Wthr, WT, O et cetera, and U.S. and get back into the front seat.
And I am 100% sure when U.S. wanted to get back into the front seat and engagement with the allies and China will be more than delight.
To step back to stick, a second or third or fourth seed and.
And to collaborate with the United States for climate change and all the other activities that.
That all the nations around the world needs to work together so.
So I would expect that if that happened there's no question one.
Well the as.
Republican Party or Democrat.
At the end of today.
Us well.
We'll compete with China economically.
And I think it's the right thing to do to commit to compete.
Oh, that's nothing wrong to compete.
But on the other hand, I think that I have also strong confidence that.
There's going to be a lot more.
Business.
Exchange between us in China.
Just reflect back for the last few months now.
Now why is it doesn't get a whole lot of news coverage.
JP Morgan City Bank, Morgan Stanley or increase their stake.
In the joint venture in China, taking majority ownership.
Blackrock.
Neuberger Berman and a few others and.
And the fund management business are getting new license insurance company getting new nice license everyday American express getting new license.
Costco opening more stores Starbucks opening more stores in fact, UES business never stopped.
Never stopped you know.
Expanding into China, and the Chinese government also have never stopped bringing them in and giving them even more.
Okay.
[noise] business opportunities than has ever been given before in fact, just last week. So.
Senior Minister in China are talking about additional intellectual protection right for foreign direct investments in China.
So on a day to day basis.
For people like us that constantly watching what's happening between us in China and actually if you look at regulation instead of just.
Mainstream media news.
We are seeing China, and making that aggressive effort to continue to open up the market.
Sledding foreign investors to take on the majority ownership of full ownership and multiple different industries.
Granting licenses that that never granted before I and then changing.
The law claims of intellectual property protection and.
And also penalizing companies are forced transfer of technology and so for all of the things that we've been hearing.
Many many times strong.
The U.S. trade representative like Hisun do all of those things that we've been hearing they are making the changes to it now they're not broadcasting all over the world.
But they are making the changes and these business was it from us or from Europe, a directly benefiting from it so in the Swiss position is that well most of those are irrelevant to us to a certain degree because we're not going to get some big.
They invest capital investments and then get certain license or some type of new business our position is that.
Oh, the cross border business still strong.
And China has emerged from the pandemic.
Back to business as usual.
Many of my colleagues in Shanghai and Sun Jen.
We go out to movie theaters.
Having dinner with their friends.
Don't even have to wear masks.
So I'm happy for them so.
So they are doing business and we absolutely are they're doing business also.
You look at Hong Kong.
Don't come to a de stock exchange is going over past us.
US in terms of IPO listing.
Because companies are all going they're lining up unicorn after unicorn lining up in Hong Kong, and Shanghai Stock Exchange Sun Sajan stock exchange through this.
Through these IPO still can be a lot more to do.
Millionaires to billionaires and they all need to make investments they all need to have there.
Their personal wealth management and they are buying properties around the world U.S. still.
One of the.
Prefer places.
For either resi investments or other investments. So we do feel comfortable that business is going to be there.
So well we have no no ability to predict what the outcome is for the election coming on November 3rd, but one way or the other one thing I can guarantee everyone.
This wasn't know how to adjust and adapt.
And find way to thrive under whatever circumstances.
Thanks Dominic.
Better.
Backdrop there.
Thank you.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Dominic Ng and closing remarks.
Thank you again and thank you for joining us.
Oh.
And we are looking forward to speaking with all of you in January.
[music].
Bye bye.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.