East West Bancorp Inc (EWBC) 2020 Q4 法說會逐字稿

Good day and welcome to East West Bancorp's Fourth Quarter and Full Year 2020 Financial Results Conference Call.

(Operator Instructions) Please note this event is being recorded.

I would 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 for the full year and fourth quarter of 2020.

With me on this conference call today are Dominic Ng, our Chairman and Chief Executive Officer; and Irene Oh, our Chief Financial Officer.

We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties.

For a more detailed description of risk factors that could affect the company's operating results, please refer to our filings with the Securities and Exchange Commission, including our annual report on the Form 10-K for the year ended December 31, 2019.

In addition, some of the numbers referenced on this call pertain to adjusted numbers.

Please refer to our full year and fourth quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures.

During the course of this call, we will be referencing the slide deck that is available as part of the webcast and on the Investor Relations site.

As a reminder, today's call is being recorded and will also be available on replay format on our Investor Relations website.

I will now turn the call over to Dominic.

Thank you, Julianna.

Good morning and thank you, everyone, for joining us for our Full Year and Fourth Quarter 2020 Earnings Call.

I will begin the review of our financial results with Slide 3 of our presentation.

This morning, we reported full year 2020 net income of $568 million or $3.97 per share.

We returned 1.16% on assets and 11.2% on equity for the year.

Thanks to the unflagging commitment of our associates, we are successfully navigating the COVID-19 pandemic and the resulting economic crisis and also the low interest rate environment.

The fourth quarter was a strong end to the year, and resulted in net income of $164 million or $1.15 per share, increased by 3/4 -- by 3% quarter-over-quarter.

Fourth quarter return on asset was 1.24%, and return on equity was 12.45%.

In Q4, we earned $251 million of pretax pre-provision income on total revenue of $416 million.

Quarter-over-quarter, our revenue grew by 10%, w by 10%, reflecting loan growth and higher fee income.

Our pretax pre-provision income grew by 12%, and our pretax pre-provision profitability ratio expanded by 12 basis points to 1.9% in the fourth quarter, up from 1.78% in the third quarter.

Importantly, we saw across-the-board improvement in our asset quality metrics, such as declining deferral and delinquency rates, lower net charge-offs, and decreasing nonperforming and criticized assets.

The macroeconomic outlook for post-pandemic recovery has been steadily improving.

And as we begin 2021, we are optimistic about the year ahead.

And now moving to Slide 4 for a summary review of our balance sheet.

As of December 31, 2020, total loans reached a record high of $38.4 billion, growing by 10% annualized from September 30 and by 10% year-over-year from December 31, 2019.

Paycheck Protection Program, PPP loans, totaled $1.6 billion as of December 31, 2020, a decrease of $204 million from September 30 due to forgiveness of loans by the SBA.

We are participating in the current round of PPP to support our customers and communities.

And as of yesterday, we funded over 2,600 new PPP loans totaling over $380 million.

Excluding PPP, total loans grew by $1.16 billion in the fourth quarter.

This reflects growth in all of our major loan portfolios.

Fourth quarter loan production was broad-based and came from across our various lending teams and branch network, diversified by loan product, industry, geography and property type.

We think that this lays a strong foundation for the coming year.

Deposit growth was exceptionally strong in 2020.

As of December 31, total deposits reached a record high of $44.9 billion, growing by 30% annualized from September 30 and by 20% year-over-year.

In particular, noninterest-bearing deposit reached a record $16.3 billion as of December 31, 2020.

Throughout 2020, growth in noninterest-bearing deposit balances outpaced total deposit growth.

Noninterest-bearing demand deposit made up 36% of total deposits as of December 31, 2020, up from 30% a year ago.

Similar to loan growth, deposit growth was well diversified across our commercial teams and branch network, including cross-border clients, reflecting the addition of new customers and expanding wallet share of existing relationships.

We look forward to the strong momentum in core deposit growth carrying into the coming year.

Turning to Slide 5. You can see that we ended the year with a common equity Tier 1 ratio of 12.7% and a total capital ratio of 14.3%, providing us with meaningful capacity for growth to support our customers.

Our book value and tangible equity per share were both up 3% from the prior quarter.

And our tangible equity to tangible asset ratios remained at 9.3% as of December 31, 2020, compared with September 30.

Year-to-date, we increased tangible equity per share by 9%.

Given our strong capital ratios and positive earnings growth and trajectory, I'm pleased to announce that East West's Board of Directors approved a 20% increase to the quarterly common stock dividend from $0.275 per share to $0.33 per share, equivalent to an annual dividend of $1.32.

The new dividend will take effect beginning in the first quarter and is payable on February 23, 2021, to stockholders of record on February 9, 2021.

Moving on to a discussion of our loan portfolio, beginning with Slide 6. C&I loans outstanding, excluding PPP, were $12.1 billion as of December 31.

And total C&I commitments were $17.1 billion.

Quarter-over-quarter, C&I loans outstanding, ex PPP, grew by 18% annualized.

Fourth quarter C&I growth built on the positive momentum in pipelines and commitments that began in the third quarter.

In 2021, we expect C&I growth to be stronger in the second half of the year compared with the first half as the anticipated post-pandemic economic recovery takes hold.

Fourth quarter C&I growth was well diversified by industry, with notable commitments, growth in general manufacturing and wholesale, private equity, entertainment, food-related industries and clean energy.

Further diversifying our C&I growth was growth from our Greater China portfolio, which was $1.5 billion as of December 31.

In the fourth quarter, loans in the Greater China grew by $160 million, accelerating from growth of $82 million in the third quarter.

The utilization rate of loans outstanding to total commitments was 70.5% as of December 31, 2020, essentially unchanged from September 30.

Moving to Slide 7 and 8, which shows essential details of our commercial real estate portfolio.

Total commercial real estate loans were $14.8 billion as of December 31, 2020.

Quarter-over-quarter, this portfolio grew by 4% annualized from September 30.

Presently, this is a slower-growing portfolio, reflecting our conservative underwriting in the current environment and a lower level of transactions in the market, both for new deals and for refinancing.

We expect to see relatively slower growth from commercial real estate in 2021 until the anticipated post-pandemic economic recovery gains momentum.

On Slides 9 and 10, we provide details regarding our single-family residential loans and home equity lines.

During the fourth quarter, we originated $1.1 billion of residential mortgage loans, an increase of 38% compared with $768 million in the third quarter.

This was a record quarter of residential mortgage origination for East West, and we are seeing the momentum continue in January.

As of December 31, single-family residential loans were $8.2 billion, up by 20% annualized from September 30.

Home equity lines outstanding were $1.6 billion as of December 31, up by 23% annualized from September 30.

Including unfunded commitments, total commitment on home equity lines were $3.4 billion at December 31.

And the utilization rate was unchanged quarter-over-quarter at 48%.

I will now turn the call over to Irene for a more detailed discussion of our asset quality and income statement.

Irene?

Thank you, Dominic.

I'll start by discussing loans on COVID-related deferral on Slide 11.

As of December 31, 2020, loans on full payment deferral were 1.2% of total loans, down from 2.7% as of September 30.

Including loans on partial payment deferral, which generally were modifications of P&I payment to interest-only, deferred loans totaled 2.6 million (sic) [2.6%] of total loans, down from 4.2% as of September 30.

Quarter-over-quarter, loans on COVID-related deferrals decreased by 36% between September 30 and December 31.

The largest improvement was in our commercial real estate loan deferrals, which decreased by $451 million or 39% since September 30.

As of December 31, the deferral rate on CRE was down to under 5%.

Deferrals on residential mortgages decreased by 35% in fourth quarter.

And the deferral rate on residential mortgages was 2.5%.

The deferral rate on C&I loans continue to be very low.

Turning to Slide 12 for a review of our asset quality metrics and Slide 13 for a review of our allowance for loan losses.

Along with the decline in COVID-19-related deferrals, we're very pleased with the across-the-board improvement in our asset quality metrics this quarter.

Quarter-over-quarter, our criticized and nonperforming assets declined, and related asset quality ratios improved.

The outlook for an economic recovery continues to strengthen.

Our borrowers have proven to be resilient and adaptable.

We feel comfortable with the credit risk in our portfolio and believe that credit costs in 2021 will be manageable.

Nonperforming assets were 45 basis points of total assets as of December 31 in the amount of $235 million, a quarter-over-quarter decrease of 10%.

Accruing loans 30 to 89 days past due were $51 million or 13 basis points of total loans as of December 31, a quarter-over-quarter decrease of 40%.

Criticized loans were $1.2 billion as of December 31 or 3.2% of total loans, a quarter-over-quarter decrease of 18% from $1.5 billion as of September 30 or 3.9% of total loans.

Within that, both classified and special mention loans declined quarter-over-quarter, and their respective ratios improved.

As of December 31, 2020, classified loans decreased to 1.7% of total loans, and special mention loans decreased to 1.5% of total loans.

Criticized C&I loans were diversified by industry, and the criticized commercial real estate loan were likewise diversified by property type.

The largest concentration within criticized loans by either industry or property type remained oil and gas.

Quarter-over-quarter, criticized CRE loans decreased by 19%.

And criticized C&I loans, excluding oil and gas, decreased by 18%.

Criticized oil and gas loans were $324 million as of December 31, a quarter-over-quarter decrease of 74% or 19% -- $74 million, excuse me, or 19%.

Reduction in these loans came from exits, paydowns and upgrades.

Oil and gas loan charge-offs were under $1 million in the fourth quarter.

The backdrop for the oil and gas borrowers have strengthened with higher commodity pricing and demand.

On Slide 13, we review the components of our allowance for loan losses.

Our allowance for loan losses totaled $620 million as of December 31 or 1.68% of loans held for investment, excluding PPP loans, compared with $618 million or 1.73% as of September 30 and compared with $483 million or 1.39% on day 1 post-CECL.

Year-to-date 2020, post day 1 of CECL, we added $137 million to the allowance, largely due to the deterioration in the economic forecasts due to COVID.

However, the economic forecasts have improved in the second half of 2020, resulting in modest declines in the required allowance coverage for all of our major loan portfolio classifications.

If the macroeconomic conditions continue to improve and credit quality holds or improves, we expect to see continued reduction in the required allowance ratio.

During the fourth quarter, we reported $24 million in provision for loan losses compared to $10 million in the third quarter.

The quarter-over-quarter increase in the provision was primarily due to fourth quarter loan growth of over $1 billion, excluding PPP loans.

The other allowance drivers, including the improved macroeconomic forecasts; lower deferral rates on commercial real estate; and reductions in adversely graded, delinquent and nonperforming assets; lower oil and gas exposure; and certain charge-offs, largely offset each other.

Net charge-offs in the fourth quarter were $19 million, a decrease of 22% from $24 million in the third quarter.

The fourth quarter net charge-off ratio was 20 basis points of average loans annualized, an improvement of 6 basis points from the third quarter.

A quarter-over-quarter increase in commercial real estate charge-offs in the fourth quarter was more than offset by the quarter-over-quarter decrease in C&I charge-offs.

Fourth quarter charge-offs from oil and gas loans totaled under $1 million.

And now moving to a discussion of our income statement on Slide 14.

In this slide, we summarize the key line items of the income statement, which I'll discuss in more detail on the following slides.

Fourth quarter 2020 included some non-GAAP adjustments related to the 2019 write-off of DC Solar tax credit investments, which added $3 million or $0.02 per share to earnings.

Fourth quarter amortization of tax credit and other investments included $11 million of recoveries related to DC Solar.

And fourth quarter income tax was elevated by $8 million of tax expense related to DC Solar.

Largely as a result of DC Solar-related items, the effective tax rate for the fourth quarter was 23% compared with 19% in the third quarter 2010.

The effective tax rate for the full year 2020 was 17% compared to 20% for 2019.

I'll now review the key drivers of our net interest income and net interest margin on Slide 15 through 18, starting with average balance sheet growth.

Fourth quarter average loan growth of -- fourth quarter average loans of $37.7 billion grew by $565 million or 6% linked-quarter annualized, led by growth in residential mortgage; followed by C&I loans, excluding PPP; and commercial real estate.

Fourth quarter average deposits of $44.4 billion, grew by $3.2 billion or 31% linked-quarter annualized, driven by very strong growth in noninterest-bearing demand deposits which grew at a rate equivalent to 56% annualized.

All other deposit categories, excluding CDs, also grew.

With the strong deposit growth, we ended the year with an average loan-to-deposit ratio of 85%.

Average available-for-sale debt securities increased by almost $1 billion from the third quarter as we deployed some of our cash.

Late in the quarter, we also added $250 million to repo assets which did not yet show up in average balances.

We continue to deploy excess liquidity into AFS securities, but given the low interest rates and the flat yield curve, attractive opportunities are limited.

In October of 2020, we utilized our excess liquidity to pay off in full the PPPLF, which was $1.4 billion as of September 30, 2020.

In the second quarter of 2021, we have $400 million of FHLB advances maturing at a rate of 2.25%.

On Slide 16, you can see the fourth quarter 2020 net interest income of $347 million increased by $27 million or 7% linked-quarter.

And the net interest margin of 2.77% expanded by 5 basis points from the prior quarter.

Excluding the impact of PPP loans and the PPPLF, fourth quarter adjusted net interest income of $333 million increased by 5% -- or $5 million quarter-over-quarter.

And fourth quarter adjusted NIM of 2.76% compressed by 1 basis point from the third quarter.

PPP loans interest and deferred fee income was $14 million in the fourth quarter, up from $8 million in the third quarter.

In the third quarter, we adjusted the deferred fee income to account for the slower-than-anticipated forgiveness and payoff of these loans.

As of December 31, we have $13 million of deferred fees on last year's PPP loans left to accrete in 2021, plus of course the interest income of 1% on the PPP loans outstanding.

Dominic took care of the month-to-date funding of new PPP loans earlier on the call.

Based on that and applications in process, we expect to fund approximately $650 million of new PPP loans in 2021, generating approximately $28 million of gross PPP fee income plus interest.

The 5 basis point quarter-over-quarter increase in the fourth quarter GAAP NIM breaks down as follows: Up 6 basis points from a lower cost of deposits, up 5 basis points from more PPP income, up 1 basis point from repayment of the PPPLF, partially offset by down 6 basis points from excess liquidity in the form of more lower-yielding assets and also down 1 basis point from lower loan and other earning asset yields.

Turning to Slide 17.

Fourth quarter average loan yield of 3.68% expanded by 8 basis points from last quarter.

Excluding the impact of PPP, the fourth quarter adjusted loan yield of 3.69% contracted by 1 basis point quarter-over-quarter, exhibiting relative stability.

The [down] in pricing of our variable rate loan portfolio is behind us.

In the upper right quadrant, we laid out our average loan yields by portfolio.

As you can see, our single-family residential mortgage product is the least rate-sensitive portfolio and continues to carry attractive yields.

Turning to Slide 18.

Our cost of deposits continued to decline in the fourth quarter as maturing higher-rate CDs repriced to current market rates.

We expect to continue to reduce our cost of deposits as time deposits mature in the first quarter of 2020 reprice lower.

Our average cost of deposits for the fourth quarter dropped to 25 basis points, down from 33 basis points in the third quarter, an improvement of 8 basis points.

The spot rate of total deposits as of December 31 was 22 basis points.

Month-to-date in January, the spot rate is down another 2 basis points to 20 basis points.

Our fourth quarter average cost of interest-bearing deposits dropped to 40 basis points, down from 50 basis points in the third quarter, an improvement of 10 basis points.

The spot rate of interest-bearing deposits as of December 31 was 35 basis points.

Month-to-date in January, the spot rate is down another 3 basis points to 32 basis points.

The average cost of CDs in the fourth quarter was 74 basis points.

We have $1.3 billion CDs maturing in the first quarter at a blended rate of 1.22%.

The rate paid on originations or renewals of domestic CDs in the fourth quarter of 2020 was 25 basis points compared to 43 basis points in the third quarter.

Month-to-date in January, this rate ticked down to 22 basis points.

Moving on to fee income on Slide 19.

Total noninterest income in the fourth quarter was $70 million compared with $54.5 million in the third quarter.

The quarter-over-quarter increase was driven by a number of factors, including a favorable change in the credit valuation adjustment of interest rate contracts, an increase in customer-driven foreign exchange transactions, and an increase in net gains on sale of SBA loans.

Further, treasury management fees continue to grow nicely as we grow commercial deposit accounts and transactions.

Moving on to Slide 20.

Fourth quarter noninterest expense was $179 million, an increase of 4% linked quarter.

Excluding amortization of tax credits and other investments and core deposit intangible amortization, adjusted noninterest expense was $166 million in the fourth quarter, an increase of 7% quarter-over-quarter and essentially flat year-over-year.

The quarter-over-quarter change in operating expenses was primarily driven by increased bonus compensation accrual and increased REO expense, which was included in other operating expense.

Fourth quarter adjusted efficiency ratio was 39.8%, an improvement from 40.8% in the third quarter.

Over the past 5 quarters, our efficiency ratio has ranged from 38.3% to 40.8% despite operating headwinds from the COVID pandemic, related economic slowdown, and near 0 interest rates.

And with that, I'll now review our outlook for 2021 on Slide 21.

For the full year 2021, we currently expect year-over-year loan growth, excluding PPP, of 6% to 8%.

For context, loan growth, excluding PPP, was 6% in 2020 and 7.5% annualized for the second half of 2020.

We [expect] well diversified growth in 2021 coming from all of our major loan portfolios.

The diversification of our loan portfolio in terms of loan type, industry, real estate property and geography allows us to outperform our peers in terms of loan growth year in, year out.

Year-over-year adjusted net interest income growth, excluding PPP, generally in line with loan growth on a full year basis.

Underpinning our interest rate -- interest income assumptions is the current forward interest rate curve.

Adjusted noninterest expense growth, excluding tax credit investment amortization, of 3% to 5% year-over-year.

In the current environment, we are focused on net interest income and pretax, pre-provision income growth.

Provision for credit losses to range between $70 million and $80 million.

With the loan growth that we expect, plus further improvement in the economic forecast, this provision outlook anticipates that the allowance coverage of loans will continue to modestly reduce from current levels.

Full year 2021 effective tax rate of approximately 15%, including the impact of tax credit investments.

There will be quarterly variability in the tax rate due to timing of tax credit investments placed into service.

With that, I will now turn the call back over to Dominic for closing remarks.

Thank you, Irene.

In summary, we had a strong finish to a most unprecedented year.

It has been a challenging year for many, and I wish to thank all of our associates for their commitment and dedication to meeting our customers' banking needs.

As I said at the beginning of my remarks, we are optimistic about the year ahead, including the expected additional government stimulus to rebuild businesses and communities, enhanced support for public health and the broader distribution of COVID-19 vaccines.

In addition, we're looking forward to an improvement in the discourse between the U.S. and China, which will be constructive for cross-border capital flows and accordingly for our clients' business opportunities.

We have strong capital and liquidity to support balance sheet growth as the economy recovers.

And we are confident that we will be able to deliver another year of strong financial performance for our shareholders in 2021.

I will now open up the call to questions.

Operator?

(Operator Instructions) Our first question comes from Ebrahim Poonawala with Bank of America.

I guess just first question on credit, there are 2 things you can address, I guess, Irene.

One, talk to us about the remaining deferrals, both the partial and the full deferrals.

When is the sunset for these?

When do they come to an end?

And separately, if you could address your outlook on net charge-offs.

As I think about what you talked about reserves -- potential for sort of reserve release relative to your provisioning guidance.

So if you could address those 2.

Sure.

On the deferrals, I think we talked about before, earlier in 2020, most of the deferrals, P&I or just the principal, were for 3-month periods.

I would say that the ones that we had that were outstanding at year-end, some of them, given just the nature and the process of deferrals every 3 months, are a little bit longer term.

But on average, I would say still 3 to 6 months is what those deferral terms are.

On the charge-off ratios and our expectations for 2021, I want to just start by saying, if you look at the full year or the fourth quarter for 2020, the charge-off ratios were very low, annualized, for the fourth quarter 20 basis points; full year of 17.

And so at this point in time, I think it's realistic to think that it may increase a little bit from these levels.

But as we look at credit quality as it stands today, there's nothing that we're really concerned that the charge-off ratios will increase dramatically.

Got it.

And just on a separate note, maybe Dominic.

When you think about the C&I loan growth for the year, do you see there's more potential for upside surprise or downside risk to your outlook?

And just talk to us about any new opportunities that you see on the C&I lending front that could be a meaningful growth driver for the bank.

Well, we're always working on an upside surprise.

But that being said, I think that we pretty much look at this year.

Now the fourth quarter is exceptional.

18% annualized growth is really a cumulation of efforts from the third and the fourth quarter.

And we kind of like somewhat highlight in the third quarter that we were developing a much stronger pipeline.

So all those loans get booked in the fourth quarter, so that was exceptional.

But if we look at the second half of 2020, sort of like annualized growth was about 7% for C&I.

So we're kind of using that as our current run rate.

And we feel pretty good about where we are today because we were able to grow in a very diversified direction, from industry types, product mix and geographic regions, including even the Greater China region.

As I mentioned earlier in my remarks that Greater China -- obviously, the Chinese economy is recovered ahead of the United States.

And so we saw positive C&I loan growth in Hong Kong and China in the third quarter, a 6.5% annualized growth for C&I loan growth in Greater China in third quarter, and then accelerate in the fourth quarter to 12% annualized growth.

So we see that all as -- so good signs.

And then if we look at so far domestically from private equity general wholesale, manufacturing, entertainment, clean energy, all of these different areas were growing.

So from that standpoint, overall right now, we expect them to continue to do well.

And so hopefully, we'll do better than what we forecast.

But in terms of downside, I guess the downside will be, in case -- I don't know, if there is a -- the vaccine distribution not working well.

And then somehow, the execution from the government and towards the stimulus plan was not working and so forth.

And then that can potentially sort of like derail some of the customers' confidence to invest or to grow the business, that can potentially happen.

But I look at the current administration, it looks like we have all very seasoned veterans that are managing the best they can.

I have, I think, a higher confidence at this point that there's a high likelihood that they will be able to get the economy turned around in the second half of the year.

Our next question will come from Ken Zerbe with Morgan Stanley.

Great.

My first question, just in terms of your NII guidance that it's going to generally be in line with loan growth.

Your loan growth comments that you said, obviously, that loan growth picks up in the back half of the year.

Should we expect the NII to follow that same trend?

Like that it stays relatively flat in first half, and then it accelerates in back half for an average of, just call it, 6% to 8%?

Or would love any commentary.

Ken, so our guidance is end-of-period loan growth of 6% to 8%.

So with the NII obviously following the average loan growth for the year.

I think in general probably when you look at that, maybe on the lower end of the 6% to 8% is probably what makes sense for that calculation.

Got it.

Understood.

Okay, yes.

I was thinking of it actually end of period.

That totally makes sense.

And then just a separate question.

In terms of your CECL day 1 reserve, I think it was about 135 basis points, but I could be wrong.

Is that still a good target, post pandemic, of where you might want to be given your current loan mix?

Yes.

Certainly as you know, it's a very complex calculation, so I can't comment on necessarily where I think it's going to end up.

But I would confidently say, as the economy recovers, as the credit quality continues to improve, that I believe there's certainly room to lower that allowance from the levels we are today.

Our next question comes from Michael Young with Truist Securities.

Preemptive congratulations on the year of the ox.

I hope it's better than the year of the rat.

I wanted to ask just literally on the charge-offs this quarter and maybe what you see coming through the pipe.

I know, generally, you guys loan to a very low loan-to-value on commercial real estate.

So kind of just curious what's causing the actual charge-offs in those buckets?

Yes.

So the tariffs for CRE in the quarter, we -- obviously especially with the pandemic and the environment, there are some loans that we're working through.

So these have been kind of problem nonperforming loans for a while.

And depending on kind of looking at where the cash flows are and valuations at year-end, kind of making sure that the books are in order, took the charge-offs.

Okay.

So they're burning through kind of 30% to 50% equity cushions at resolution?

Yes.

Well, yes, I think for these specific loans that are problematic, certainly the circumstances are unique, which is why -- which is what you're referring to, right, generally, for our borrowers.

And the loan to values being so low, there's a lot of equity.

But there are specific situations related to really cash flow, which is why we took the charge-offs.

I do want to add that overall from a commercial real estate portfolio, multifamily, office building, hotels, retail, shopping centers and then industrial buildings, you name it, all of that, I mean as of today, we have a pretty strong portfolio based on not only just LTV, but many of our customers, despite the pandemic, are still getting by quite well.

So in fact that's what you see the classified and criticized assets ratio coming down and deferral coming down.

And surprisingly, we always expect that these customers should do well, should do better as an average compared with industry as a whole because of the low loan-to-value.

And then also many of them have personal guarantee and they have a lot of liquidity.

But I think the pandemic was a very good stress test to see how, overall, most of these customers have done well.

I mean, obviously, we always have a few isolated incidents here and there, and that's what happened.

Okay.

And maybe just as a follow-up on the residential lending, which seems like it might be a larger portion of the growth this year.

What rate of provision do you put on that?

And should we expect then kind of a lower growth rate of fee income as a result of that higher mix of resi loans?

Yes.

For East West and the residential lending portfolio that we have in this product, some variation of it that we've been originating for 40 years, the credit quality generally has been outstanding.

In general, the reserve that we have for our single-family and also the HELOCs, which I might add, are largely first lien HELOCs, is quite low relative to the allowance that we book for the rest of the portfolio.

And in fact with improvements in the forecasts, during the fourth quarter, we reduced the kind of required reserve from about 30 basis points down to 20.

Overall, as I mentioned, with the data that we have of the historic losses over the course of 10, 20 years, it's been incredibly low for this portfolio.

Your next question comes from Dave Rochester with Compass Point.

On your NII guide, I was just wondering what your thoughts were on adjusted NIM that you're expecting in that.

And given the strong securities growth in the quarter, if I could just hear your assumptions for that growth and deposit growth, which all will ultimately impact earning asset growth and NII as well.

Yes, Dave.

I think your question is really may be the most unknown thing for U.S. bankers right now as far as the liquidity and the deposit growth that most banks are continuing to experience.

I think for us, when we look at the growth of NIM and NII, we're very comfortable that we'll be able to expand from the fourth quarter levels.

Not year-over-year, but certainly from the fourth quarter levels, and that we'll be able to maybe just kind of continue to expand throughout 2021.

I'll also add, maybe one of the key drivers of why we're comfortable, although on the asset side there are some challenges.

Largely asset side, things have repriced down.

Securities now I'll share, like for example, the securities that we're buying in January are probably yielding about 1.7% or so.

We had extended out the duration a little bit, but not extensively.

And then what we have there, where we're more comfortable, is we do have a lot of deposits yet and the funding that we expect to reprice over the course of the coming months.

Okay.

Great.

And just one follow-up on capital.

You've got plenty of excess capital.

And the buyback is still outstanding, you haven't done anything with it since early last year.

Was just wondering what you guys are waiting for at this point.

It looks like you've had some good improvement on the credit side.

Regulators seem to be warming to it a little bit with the DFAST banks announcing buybacks for this quarter.

So I just want to get your updated thoughts there.

Yes, you're right.

We still currently have a buyback authorization outstanding of $354 million remains.

At this point, we not -- we do not anticipate doing any buyback in the near future.

Because frankly, we look at where we are right now.

We're excited about the growth opportunities ahead of us.

And frankly, we prefer to have capital available to take advantage of any emerging opportunities that may come.

And as of today when we looked at where we are from a return perspective, currently, we are generating attractive return on equity.

And we actually think we can hopefully do even better going forward.

So from that point of view, it's not something that we lack of return that we need to buy back to push earnings per shares and stuff like that.

Our position is that, from my experience for many years at East West Bank, we've always done best whenever there is any kind of economic inflection point.

And so one of the reasons why we always done best is not just ability to execute and all the other -- what our associates who have done a great job, but more importantly, we have a lot of capital always at that time, and allow us to be in position to take advantage or turn crisis into opportunities and so forth.

So I generally inclined to stay with a little bit more capital.

And -- but we will continue to watch the -- our ability to generate above-average return of equity for our shareholders, as long as we feel that we can do that.

And then we will continue to stay in this position for now until a great opportunity come along that we may deploy the capital differently.

Our Board of Directors are all very engaged.

So the beauty of where we are right now, if I look at from a capital perspective, we're really looking at the situation that we can just make a Zoom call with our Board members any time and have a discussion, execute a buyback.

So it's not like there's any kind of regulatory constraint or any of the other issues.

It's very different than when we're building up a separate C&I platform or when we start building something monumental.

So this is something that is very easy to do, and we are always shareholders-friendly.

And we know exactly once the right time to announce a buyback, which we did back in early last year.

So I mean that's the part that we -- philosophically, we are in line with our shareholders, and we will do the right thing.

It's just a matter of like level of confidence that we have right now for potential future opportunities.

And then that's where we stand at this point.

Our next question comes from Chris McGratty with KBW.

Dominic, I just wanted to follow up on that prior question.

Is there a shift in maybe willingness to do a deal if you're not going to buy the stock?

I mean, I understand the confidence in the growth outlook, but I'm wondering if a deal might be more on the table in '21 than it was in prior years.

Well, I mean we're always interested.

I mean, if you look at our capital ratio, we always have the capital that allow us to look into various opportunities.

It's just a matter of like when the right deal come along, we have the capacity from a people perspective, from a capital perspective, to actually to enter into a positive transaction.

But you also have to take a look at where we are.

If we reflect that from the last very tiny acquisition that we made was in 2014 for MetroBank in Texas, a very small institution for about $2 billion in size.

And at that time, since then, we've been growing organically, and we have doubled our size in less than 6 years.

So we've done pretty well organic growth -- through organic growth.

So our challenge really is more internal.

The internal issue is that how do we justify any acquisition when we have the ability to double our size in less than 6 years?

And so look like, going forward, we still have that ability to continue to grow organically.

And so from that perspective, any kind of potential acquisition that we look at, it needs to be very attractive.

So I mean, that's what we're looking at right now.

But when the attractive deal comes along, we absolutely will be interested to look at it.

So again, let's repeat the same philosophical view that I shared earlier, is that we are shareholders-friendly.

We'll always do what's good for the bank and what's good for the shareholders.

That's great color.

Just a follow-up on the deposit growth, the tremendous deposit growth you've seen this year.

I'm interested in kind of any niches that are driving a disproportionate amount of that growth in the noninterest bearing.

The ratios you gave, the high 30s percent of total deposits is a great ratio.

I'm just wondering what specific businesses might be driving that.

It's coming from all over the place.

That is if I look at the C&I industry verticals that we talked about, so each and every one of them contributes.

Even in commercial real estate, we have new commercial real estate customers.

They contributed.

I would say -- and then of course, retail banking, we're actually doing quite well.

So I would say that not only each and every one of them contributed, I think, as I shared earlier in my remarks, is that we brought in quite a few new customers would generate new deposits.

And then we also got increase in deposits from existing customers.

Because through the years of investments in the core capability, product enhancement in our cash management area, our payment -- so our payment capability is getting better and better.

That in the past, we have customers that while we were having a lending relationship, we only get a smaller share of the DDA because we did not have the technical capability to serve a more complex cash management business that some of our clients have.

These are somewhat sophisticated, larger customers.

The last few years, through investing, we continue to improve our cash management and treasury management capability, and also FX, et cetera.

So that get us, too, in the position that we are getting a larger wallet share of these relationship with existing customers.

So it's really a combination of both new and existing customers.

And I do want to emphasize is that we bring in a lot of small retail customers one customer at a time at the retail branches.

Despite the pandemic, our branches were open obviously every single business day, and they are there to attract new customers.

The PPP first round was very helpful.

In April -- from April to June, we actually brought in quite a few new customers.

So it's all the combination that get us into where we are today.

So I can't think of any particular one that actually make that big of a difference because it's just across the board.

Our next question comes from Jared Shaw with Wells Fargo Securities.

Just going back to, I guess, the margin discussion.

I was surprised to see the securities book grow so much and you're able to maintain the yield.

Are you changing, I guess, the dynamic of what you're purchasing there in terms of either taking structure or credit risk in the portfolio?

And I guess can you talk a little bit about where you -- or how you deployed that $1 billion and what you were buying in that?

Jared, yes.

So in general, I would say we haven't really taken a lot of credit risk.

We have extended the duration.

The duration has gone up quarter-over-quarter, well obviously because of the steepening of the curve, but also the securities that we're purchasing.

So as a comparison, we're about 3.84% as of 9/30 and that's inched up to 4.25%.

And generally if you look at the mix of the securities portfolio, not substantially different from what we've had before as far as what we're buying.

But overall, certainly given the lower-for-longer environment, we're taking a long, hard look at kind of what we're comfortable with from an interest rate risk perspective.

And then as far as the increase, certainly -- and that's also a function really of us, of the comfort level as far as the deposit, the deposit growth that we anticipate.

And then of course especially with our commercial customers, sometimes, their balances with us can be -- go up and down depending on their cash needs.

But as we realize that the excess liquidity throughout 2020 was going to continue, that's why we took the actions of paying off the PPPLF and then some of the securities, moving more to securities versus keeping it in cash.

Okay.

That was good color.

And then Dominic, I heard you talk about the increased pace of lending from Greater China.

I guess how do you think that's going to translate into the pace of cross-border trade expectations?

And whether that's just pure lending or the opportunity could be growth from that type of business as well.

In terms of the Greater China region, I think that again, we will expect a gradual increase in terms of activities.

And our cross-border team in U.S. actually have done well, both -- in fact, they've grown both in loans, deposits and fee income.

And so what we are looking at in 2021 is also a continuation of gradual increase.

Just because, for the last 4 years under the Trump administration that created a lot of hostility between U.S. and China.

The way that I look at East West is that we know the -- we have strong knowledge of the business environment and the political environment between U.S. and China.

And we are very -- with our size, it's much easier to be nimble to navigate accordingly.

So despite the fact that, from the media perspective, the perception that U.S.-China business are not doing much at all, but the fact is we somehow find a way to get the business.

But as we go forward in looking at 2021 and beyond under the Biden administration, and I just expect that there will be more predictable approach.

And it will -- I think the Biden administration will bring more stability to the relationship.

So from that standpoint, we will most likely be able to gain additional business just because that -- because of the more predictable and more stable environment, that customers from both side will be more comfortable to continue to invest and so forth.

There are going to be certain areas, some very, what I call, sensitive industry that affect national security that obviously will no longer be able to conduct a lot of business between 2 shores.

But there are plenty of business that are non-national security sensitive that I expect will continue.

Things such as, even, tourism, students attending colleges in U.S., and some of the other general manufacturing, general industries, and even in health care, that do not have this, what I call, their very essential purpose in the United States.

And we expect that there will be more trade and commerce that take place between the 2 countries.

So we know what they are, and we will continue to target those business opportunities.

That's why I expect that, in the next few years, there will be more opportunity to come.

Our next question comes from Matthew Clark with Piper Sandler.

My first question was just my first question was just around the multifamily portfolio.

It was down slightly this quarter.

And the growth, I think, in 2020 was about 1/4 of what it was the prior year.

Can you just speak to your appetite in that asset class?

And whether or not you're backing away from certain markets.

And what your -- what the prospects are for growth there.

We are not backing away from multifamily.

We -- our approach has always been we work with our customers that we know well and that have strong credit history.

And whenever these customers request financing from us, we'll jump into the opportunity.

Now for multifamily, there is -- one factor is there are a lot of like a Fannie Mae-type of pricing that is hard to beat.

Sometimes, we have customers that, even they've been banking with us for many years and always look at us as a first right of refusal, but there are these very attractive pricing out there that it just makes sense for them to refi for a very low rate.

And we respect that.

And then so from that standpoint, we have, I would say, that more like a payoff due to refis for a lower rate type of situation that caused our net growth to be slow.

Got it.

Okay.

And then just maybe for Irene, the FX and derivative fee income, pretty outsized this quarter.

Is there something that would make that remain elevated here in the near term?

Or should we start to normalize that run rate?

Yes.

I think from a customer income perspective, it was a good quarter for both FX and the IRC.

IRC, and if you -- the details of this, Matthew, we have on Slide 19 of our deck.

You'll see, earlier in the year for IRC, customer revenue was much higher.

But I'll just point out for the fourth quarter, the CDA marks were positive with the kind of uptick in the 10-year.

And then also kind of lower kind of credit costs associated with the interest rate contract.

So for the quarter if you look at IRC, total GAAP revenue was $13 million.

Approximately $6.2 million of that was customer-facing income.

And then the CDA adjustment was a positive a $6.8 million.

FX was up.

We had many more kind of transactions in the fourth quarter, particularly kind of quarter-over-quarter and from the earlier part.

And we're optimistic that we'll continue to be able to grow FX year-over-year.

Our next question comes from Brock Vandervliet with UBS.

You covered Greater China performance already.

I was just going to ask in terms of is that an area now, with the change of administration, for incremental investment?

Or do you really feel like you've already got the pieces on the board that you need?

Well, in terms of incremental investment, it depends on the opportunities.

What -- we have kind of capital to allow the Greater China team to grow if need to be.

But East West has never really worked on a business model to rely on Greater China to keep fast pace of growth in order for us to generate the kind of meaningful financial performance for our shareholders.

So Greater China has always been more strategically important than quantity-driven.

So from that perspective, we'll continue to look into how we can use Hong Kong and our China team to look in opportunities.

Frankly, in the United States, many of our domestic C&I business chose East West as their banker because of our knowledge of the China business.

And often many of them, either they're importer or exporter or they may be buying components from China and so forth, have that interconnectivity between U.S. and China.

After all, these are the 2 largest -- U.S. and China, the 2 largest GDP in the world.

So that interconnectivities are there from many of the business throughout U.S. And our team in China who are able to help to provide advice and services in China or in U.S. for our clients, make a big difference and differentiate East West dramatically from other regional banks that we're competing with.

So that part has been going well.

Whether we will need to make additional investment or not, I think that will depend on any kind of potential changes in regulatory direction from U.S. and China and what kind of like potential opportunities may come.

If there is great opportunities, again, the previous question about any kind of opportunity we would be interested to look at, I'd always look at it as we look at it broadly.

And any kind of opportunities that have a high certainty to provide better return for our shareholders, we'll look at it.

So at this stage right now, I don't really have anything specific to mention.

I would just say that we are always on the lookout to identify opportunities that -- to deploy our capital wisely.

Got it.

And more broadly, do you anticipate any changes in your business model coming out of COVID?

Or not.

Not anything dramatically, no.

I would say that we have always been very much running our organization with a very sort of like a diversified approach in terms of making sure that we touch on many different industries in U.S. And we have a good percentage of loans in C&I and a -- well-balanced between C&I, CRE and single-family mortgages from the consumer side.

And we are generating stronger fee income every year from wealth management, to foreign exchange, and then cash management fee income and interest rate swap, et cetera, et cetera.

So that is still going to be in place, and we're always going to make sure we have a good balance between commercial banking and retail banking.

There are not many banks out there that are competing with us right now with our size that actually have the strong retail banking business like we do.

And so that's a big advantage for us, and we'll continue to grow our consumer retail banking business going forward.

And the other element of Greater China is that, as I said earlier, with these 2 big GDP, the world largest and the second largest, and there are plenty of business for us to identify, particularly to an organization like East West that don't really have much competition against us.

Because most of the U.S. banks really do not have this part of the growth element.

So we look at all of that, is why for years, we set our mission and vision in terms of -- and our business model to focusing on in this direction.

And I would say that this is more or less the same direction that we'll be focusing on in the next 10 years or so.

So at this point, we're very comfortable with our business strategy going forward.

Our next question comes from David Chiaverini with Wedbush Securities.

I wanted to follow up on loan growth.

C&I growth, you mentioned, turned positive in September and momentum continued into year-end.

You also mentioned that pipelines have positive momentum as you kind of look out from here.

But you also mentioned to expect slower growth in C&I in the first half of '21 versus the second half of '21.

So should we expect kind of similar C&I growth in the first half of '21 versus the annualized growth in the fourth quarter, of course on an ex PPP basis, and then a further pickup in the second half from there?

No.

As I mentioned, I think, at maybe in one of the Q&A earlier, our -- keep in mind, our fourth quarter annualized growth rate was 18%.

But if you look at the second half of the year, annualized growth rate was 7% for C&I, right?

7%.

So we're using the 7% run rate as what we expect it for the year.

And at this stage, we figure out in the current environment, just looking at the current environment with -- we're still trying to figure out, do we have enough vaccine for everybody?

Or how many more variants of the coronavirus that may pop up.

We just looked at it, is that maybe the first quarter and two, we wouldn't be expecting business to be coming back as business as usual or as strong.

But I would expect that after this -- by the summer or after the summer, business is going to come back really stronger because most of the economy is going to get back into normal, so there will be a pickup then.

So keep in mind that while we're booking commitment, as you look at the utilization rate, we are at somewhat of an all-time low, because normally in the past, we always have about 80% utilization rate.

We dropped it down to 70% as the business are not drawing -- many of them are not drawing down the lines.

So we are very pleased that we can book new business, bring new customers, but many of them are still hunkered down and not drawing their lines.

And until the economy really see some sort of like normalcy, I would expect that business will continue to be hesitant to actively draw down the line and actively engage in the full-flung business.

So from that standpoint, that's why we think that chances are it's going to be a little bit slower in the first 2 quarters, and then picking up a little bit stronger in the third and fourth quarter.

One other factor is that there's always seasonality for some of our C&I business, that in general, things tend to slow down.

Particular, expenses go down in the first and second quarter.

Because particularly the business cater to consumer retail, and there's always like stacking up the inventory right around near the end of summer, and then start stacking it up all the way till near Christmas.

And that type of core business that we have for years is still a meaningful size of business in our C&I portfolio.

And we expect that -- those business will continue to behave accordingly, which is a little bit slower in the first and second quarter, a little bit stronger in the third and fourth quarter because of the utilization behavior.

So from that standpoint, I think it's a combination of different factors that cause us to conclude with this sort of like forecast.

Very helpful.

And then shifting to a question on credit.

The oil and gas portfolio classified loans were $240 million, down 13%.

So clearly, stress is easing in this portfolio.

Would it be fair to say that the base case is for continued improvement in the oil and gas portfolio and there's potential for reserve releases here?

Yes.

I would say that's not outside of the realm of possibility.

At this point in time, you can just see from the information that we shared.

We did kind of inch up the reserve ratio at year-end compared to 9/30.

Just honestly given kind of the environment, we wanted to maintain kind of a conservative view about that.

But I would say that if things continue to improve, the reserve release is within the realm of possibility.

This concludes our question-and-answer session.

I would like to turn the conference back over to Dominic Ng for any closing remarks.

Thank you.

And thank you all for joining our call today.

And we are very much looking forward to talking to you in our next call in April.

Bye-bye.

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