East West Bancorp Inc Q4 FY2020 Earnings Call

Good day, and welcome to the East West Bancorp's Fourth Quarter and Full Year 2020 Financial Results Conference Call. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. 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 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 the Risk Factors that could affect the company's operating results, please refer to our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 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 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, and will also be available in 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 would begin with the review of our financial condition 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 unwavering commitment of our associates, we are successfully navigating the COVID-19 pandemic and the resulting economic crisis as well as 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% quarter-over-quarter. Fourth quarter return on assets was 1.24% and return on equity was 12.45%. In Q4, we earned $251 million of pre-tax pre-provision income on total revenue of $416 million. Quarter-over-quarter our revenue grew by 10%, reflecting loan growth and higher fee income. Our pre-tax pre-provision income grew by 12% and our pre-tax 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 non-performing and criticized assets. The macroeconomic outlook for post-pandemic recovery has been steadily improving. As we begin 2021, we are optimistic about the year ahead. 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. As of yesterday, we funded over 2,600 new PPP loans, totaling over $380 million. Excluding PPP, total loans grew by $1.1 million in the fourth quarter. This reflects growth in all of our major loan portfolios. For 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 because the 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, non-interest-bearing deposit reached a record $16.3 billion as of December 31, 2020. Throughout 2020, growth in non-interest bearing deposit balances outpaced total deposit growth. Non-interest-bearing demand deposits 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 and 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 remain 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 trajectory, I'm pleased to announce that the East West 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 Greater China grew by $160 million, accelerating from growth of $32 million in September. 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 show essential details about 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 slow-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're 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 - as of December 31, were up by 23%, annualized from September 30, including unfunded commitments on home equity lines were $3.4 billion at December 31. The utilization rate was unchanged quarter-over-quarter at 48%. I will now turn the call over to Irene for a more detailed discussion about asset quality and the income statement.

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. Generally, modifications of P&I payment to interest-only deferred loans totaled $2.6 million 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 within our commercial real estate loan deferrals 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 the fourth quarter, and the deferral rate on residential mortgages was 2.5%. The deferral rate on C&I loans continued to be very low. Turning to slide 12 for a review of our asset quality metrics, and slide 13 for review our allowance for loan losses. Along with a decline in COVID-19 related deferrals, we're very pleased with the across-the-board improvements in our asset quality metrics this quarter. Quarter-over-quarter, our criticized and non-performing assets declined, and related asset quality metrics 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. Non-performing assets were 45 basis points of total assets as of December 31, and 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 loans were likewise diversified by property type. The largest concentration within criticized loans, either industry or property type, remained with oil and gas. Quarter-over-quarter, criticized CRE loans decreased by 90% 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%. The reduction in these loans came from exits, payoffs, and upgrades. Oil & 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 the 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 to $618 million or 1.73% as of September 30, and compared with $483 million, or 1.39% on day one post CECL. Year-to-date 2020 post day one 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 recorded $24 million in provision for loan losses, compared to $10 million in the third quarter. The quarter recorded increase in the provision was primarily due to fourth quarter loan growth of over $1 billion excluding PPP loans. The other allowance drivers including improved macroeconomic forecasts, lower deferral rates on commercial real estate, and reductions in adversely graded delinquent and non-performing 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 and improved six 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. 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 credits and other investments included $11 million 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 90% in the third quarter of 2020. The effective tax rate for the full year of 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 loans of $37.7 billion grew by $565 million, or 6% linked quarter annualized, led by growth in residential mortgages 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 non-interest-bearing demand deposits, which grew at a rate equivalent to 56% annualized. All other deposit categories, including CDs, also grew. With 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. It continued to deploy excess liquidity into AFS securities, but given the low-interest rates and flat yield curve, attractive opportunities are limited. In October 2020, we realized 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 that 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 net interest margin of 2.76% compressed by one 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 pay-off of these loans. As of December 31, we have $13 million of deferred fees on last year’s PPP loans left to accrete into 2021, plus, of course, the interest income of 1% on the PPP loans outstanding. Based on that and applications in process, we expect to fund approximately $615 billion of new PPP loans in 2021, generating approximately $28 million of gross PPP fee income plus interest. The five 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, a 5 basis points for more PPP income, up one basis point from the payment of the PPPLF, partially offset down six basis points from excess liquidity in the form of more lower-yielding assets and also down one basis point from lower loan and other earning asset yields. Turning to slide 17, fourth quarter average loan yield of 3.68% expanded by eight basis points from last quarter. Excluding the impact of PPP, the fourth quarter adjusted loan yield of 3.69% contracted by one basis point quarter-over-quarter, exhibiting relative stability; the downward pricing of our variable rate loan portfolio is behind us. In the upper right quadrant, we laid out our average loan yields by portfolio. 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 decrease our cost of deposits as time deposits maturing in the first quarter of 2020 repriced 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 eight 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 20 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 three 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 122. 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 January, this rate ticked down to 22 basis points. Moving on to fee income on slide 19. Total non-interest 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 numerous 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. Furthermore, treasury management fees continue to grow nicely as we grow commercial deposit accounts and transactions. Moving on to slide 20, fourth quarter non-interest expense was $179 million, an increase of 4% linked quarter. Excluding amortization of tax credits and other investment and core profit intangible amortization, adjusted non-interest 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 approval and increased OREO expense, which was included in other operating income. The fourth-quarter adjusted efficiency ratio was 39.8%, an improvement from 40.8% in the third quarter. Over the past five quarters, our efficiency ratio has ranged from 38.3% to 40.8% despite operating headwinds from the COVID pandemic related economic slowdown and near-zero interest rates. And with that, I will now review our 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 non-interest 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 pre-tax pre-provision income growth. Provision for credit losses were to range between $70 million and $80 million. With the loan growth that we expect, much further improvement in economic forecasts, 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 the 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.

Thank you. We will now begin the question-and-answer session. Our first question comes from Ebrahim Poonawala with Bank of America. Please go ahead.

Good morning. Morning, I guess just first question on credit. If there are two things you can address, I guess I need 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, the potential for Federal Reserve release, and would then be a provisioning guidance.

So on the deferrals, I think we talked about before, earlier in 2020. Most of the deferrals, P&I, or just the principal were for three months period. I would say that the ones that we had that were outstanding at year-end, some of them, given the nature and the process of deferrals every three months are a little bit longer term. But on average, I would say still two to six months is what those deferral terms all 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 at 20 basis points, with a full year at 17. So at this point in time, I think it's realistic to think that if they increase a little bit from the 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, or 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 meaningful growth driver for the bank? Thank you.

Well, we're always working on an upside surprise. That being said, I think that we've pretty much looked at this year. Now, the fourth quarter is exceptional 18% annualized growth is really an accumulation of efforts from the third and the fourth quarter. And we kind of highlighted in the third quarter that we were developing a much stronger pipeline; although those loans can get booked in the fourth quarter, so that was exceptional. If we look at the second half of 2020, the annualized growth was about 7% for C&I. So we're kind of using that as our current run rate. We feel pretty good about where we are today because we're 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, Greater China obviously is recovering ahead of the United States. 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 the third quarter, and then it accelerated in the fourth quarter to 12% annualized growth. We see all this as good signs.

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

Great, thanks. My first question just in terms of your NII guidance that is going to generally be in line with loan growth. Your loan growth comments, that you said obviously, then 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 the first half and then acceleration in the back half for an average of just call it 6% to 8% or love to hear any commentary?

So, Ken, our guidance is undeclared loan growth of 6% to 8%. With the NII, obviously following that average loan growth for the year, I think in general, probably you will get that maybe on the lower end of that 6% to 8% is probably what makes sense for that calculation.

Got it, understood. Okay. I was thinking actually the end of period. That totally makes sense. And then just a separate question. In terms of your CECL day one reserve, I think it was about 135 basis points; 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 credit quality continues to improve, that I believe there's certainly room to lower that allowance from the levels we are today.

All right, thank you.

Thanks, Ken.

Our next question comes from Michael Young with Truist Securities. Please go ahead.

Hey, thanks for taking the question. And pre-emptive congratulations on the year of the Ox; I hope it's better than the Year of the Rat. Wanted to ask about the charge-off this quarter? And maybe what you see coming through the pipe? I know, I know, generally you guys went to very low loan to value on commercial real estate, so kind of just curious what's causing the actual charge-off in those buckets.

Yes, so the charge-offs for CRE in the quarter, we obviously, especially with the pandemic in the environment, there are some loans that we're working through. So these have been kind of problem non-performing loans for a while, and depending on kind of looking at where the cash flows are, evaluations, a year, and kind of making sure that the books are in order that 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 as 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 to that, overall from a commercial real estate portfolio of multifamily office buildings, hotels, retail, shopping centers, and then all industrial buildings, you name it, I mean, as of today, we have a pretty strong portfolio. They're seeing not only just LTV, but many of our customers, despite the pandemic, are still getting by quite well. So in fact, that's why you see the classified and criticized assets ratio coming down and deferral coming down. Surprisingly, we always expect that these customers should do well, should do better compared with the industry as a whole because of the low loan to value. Also, many of them have personal guarantees 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. 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 might be a larger portion of the growth this year, what rate and 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 residential loans?

Yes, for East West and the residential lending portfolio that we have, and 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 HELOC, which are my add, are largely personally HELOC, is quite low relative to the allowance that we bought for the rest of the portfolio. In fact, with improvements in the past during the fourth quarter, we reduced the required reserve from about 30 basis points down to 20. Overall, as I mentioned, with the data that we have, the historical losses over the course of 10 years and 20 years, it's been incredibly low for this portfolio.

Okay, thank you. Happy New Year.

Happy New Year. Thank you.

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

Hey, good morning, guys.

Good morning.

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 you get it here, 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 maybe the most unknown thing for U.S. banks 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, NII, we’re very comfortable that we will 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's some challenges, largely asset side things that repriced down securities. Now I'll share, like for example, the securities that we’re buying in January, probably yielding about 1.7% or so. We had extended out the duration a little bit and not extensively. What we have there, where we're more comfortable, is we do have a lot of deposit TFD, 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 got plenty of excess capital. And the buyback is still outstanding. You haven't done anything with it since early last year. I 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 East West banks announcing buybacks for this quarter. So 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 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. We prefer to have capital available to take advantage of any emerging opportunities that may come. As of today, when we look at where we are from a return perspective, currently we are generating attractive returns on equity. We actually think we can hopefully do even better going forward. From that point of view it’s not something that we lack of return that we need by back to push earnings per share and stuff like that. Our position is that from my experience, for many years at East West Bank, we always do best whenever there's any kind of economic inflection point. One of the reasons why we done that is not just ability to execute and all of the other know what our associate has done a great job, but more importantly, we have a lot of capital at that time, and allow us to be in position to take advantage or turn crisis into opportunities. I generally inclined to stay with a little bit more capital. But we will continue to watch the our ability to generate, above average return of equity for our shareholders as small as we feel that we can do that. We will continue to stay in this position for now, until a great opportunity to 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 looked at it from a capital perspective, we're really looking at the situation that we can just make a zoom call with our board members anytime and have a discussion executed a buyback. There's no kind of regulatory constraint or any other issues. This is different than when we were building up a separate C&I platform or when we start building something monumental. We are very shareholder friendly. We know exactly when's the right time to announce a buyback, which we did early last year. From that point of view, we are philosophically in line with our shareholders and we will do the right thing. It's just a matter of finding a level of confidence that we have right now for potential future opportunities.

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

Good morning.

Morning.

Hey 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 and the growth outlook, but I'm wondering if a deal might be more on the table in 2021, than it was in prior years?

Well, I mean, we're always interested. As you if you looked at our capital ratio, we always have the capital to look into various opportunities. It's just a matter of like when the right deal come along, we have the capacity, from people perspective, from capital perspective, to take advantage of a positive transaction. You also have to take a look at where we are.A reflection 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. Since then, we've been growing organically, and we've doubled our size in less than six years. So we've done pretty well through organic growth. Our challenge really is internal; the internal issue is that how do we justify any acquisition, when we have the ability to double our size in less than six years? From that perspective, any kind of potential acquisition that we looked at needs to be very attractive. We're looking at that right now. When the right view comes along, we absolutely will be interested to look at it. Our philosophical view is that we stay in line with our shareholders and always do what's good for the bank and shareholders.

That's a great color. Thanks. 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 non-interest-bearing. The ratios that gave us, the high 30% of total deposits is a great ratio. I'm just wondering what specific businesses might be driving that? Thanks.

It's coming from all over the place. If I look at the C&I industry verticals that we talked about, each and every one of them contributes. Even in commercial real estate, we have new commercial real estate customers that contributed. I would say, and then of course in retail banking, we're actually doing quite well. I would say that not only each and every one of them contributed; I think as I shared earlier in my remarks, we brought in quite a few new customers, which help generate new deposits. Then we also got an increase in deposits from existing customers. Because through our years of investments in core capabilities and product enhancements in our cash management area, our payment capability is getting better and better. In the past, we have customers that while we were having a lending relationship, we only got a smaller share of the PDA because we did not have the technical capability to serve more complex cash management business that some of our clients have. These are somewhat sophisticated modular customers applying customer-centric practices. The last few years through investing, we have continued to improve our cash management, treasury management, and also FX capabilities. That set us in a position where we are getting a larger wallet share of these relationships with existing customers. So it's really a combination of both new and existing customers, and I do want to emphasize that we are bringing in a lot of small retail customers, one customer at a time at the retail branches. Despite the pandemic, how branches will open, obviously, every single business day, and they're there to attract new customers. The PPP first round was very helpful. From April to June, we actually brought in quite a few new customers. So it's all the combination that got us to where we are today. I can't think of any particular one that actually makes a big difference because it's just across the board.

Thank you.

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

I think 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 yields. 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 you can talk a little bit about where you are how you deployed that billion dollars and what you were buying.

And 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 September 30, and that's in stuff to 4.25%. Generally, if you look at the mix of the securities portfolio, that's substantially different from what we've had before as far as what we're buying. But overall, certainly, given the low for longer growth environment, we're taking a long, hard look at kind of what we're comfortable with from an interest rate risk perspective. And as far as the increase, certainly, and that's also a function, really of us, the comfort level as far as the deposit growth that we anticipate. Of course, especially with our commercial customers, sometimes the balances with us can go up and down, depending on their cash needs. But as we realized 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 in cash. Okay, thanks for the color. Thanks. And Dominic, 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? Whether that's just pure lending or the opportunity for fee growth from that type of business as well.

In terms of the Greater China region, I think that again we will expect gradual increase in activities, and our cross-border team in the U.S. actually has done well, both in fact that they've grown both in loans, deposits, and fee incomes. So, what we are looking at in 2021, is also a continuation of gradual increase; just because during the last four years under the Trump administration, that created a lot of hostility between U.S. and China. The way I looked at it East West is that we know this, we have strong knowledge of the business environment and the political environment between U.S. and China. With our size, it's much easier to be nimble, to navigate accordingly. Despite the media perception that U.S.-China business is not doing much at all, we somehow find a way to get the business. Looking forward to 2021 and beyond under the Biden administration, I expect there will be a more predictable approach that will bring stability to the relationship. We will most likely be able to gain additional business just because of the more predictable and stable environment; customers from both sides will be more comfortable to continue to invest. There are areas that are essential to national security that obviously, we no longer will be able to conduct a lot of business between the two shores. Plenty of business that are non-national security sensitive remain that I expect will continue. Things such as even tourism and students attending colleges in the U.S. and some general manufacturing and general industries. We will continue targeting those business opportunities. That's why I expect that in the next few years, there will be more opportunities to come.

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

Good morning.

Good morning.

Hi, my first question was just around the multifamily portfolio was down slightly this quarter. And the growth I think in 2020 was about a quarter of what it was in 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 prospects are for growth there?

We're not backing away from multifamily. Our approach has always been, we work with our customers that we know well, and that have strong credit history. Whenever these customers request financing from us, we'll jump into the opportunity. For multifamily, there is one factor; there are a lot of, like 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, always look at us as a first right of refusal. Attractive pricing out there makes sense for them to refi for a very low rate. We respect that, and from that standpoint, we have lower growth, net growth due to refi for a lower rate type of situation.

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?

Yes, I think from a customer income perspective, it was a good quarter for both FX and then IRC. IRC, if you look at 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. The CBA March were positive with the kind of uptick in the 10 year and also kind of read it for lower kind of credit costs associated with interest rate contracts. The fourth quarter, if you look at IRC, total GAAP revenue was $13 million, approximately $6.2 million of that was customer-facing income. The CBA adjustment was a positive $6.8 million. FX was up. We had many more kind of transactions in the fourth quarter, particularly 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.

Okay, great. Thank you.

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

Oh, great. Thanks for the question. You covered Greater China performance already. I was just going to ask in terms of, is that an area now with a change of administration? Or 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, we have plenty of capital to allow the Greater China team to grow as needed, but East West has never really worked on a business model that relies on Greater China to keep fast pace of growth to generate financial performance for our shareholders. So Greater China has always been more strategically important than quantity driven. From that perspective, we'll continue to look into how we can use Hong Kong and our China team to look into opportunities. In fact, in the U.S., many of our domestic C&I business chose East West as the banker, because of our knowledge of the China business. Often many of them are either importers or exporters or buy components from China and so forth, have that interconnectivity between U.S. and China. After all, these are the two largest GDP in the world. That interconnectivity is out there for many of the businesses around the U.S., and our team in China can provide advice and services in either country for our clients. It makes a big difference and differentiates East West from other regional banks that we're competing with. So that part has been going well, though we will need to make additional investment or not depends on changes in regulatory direction from U.S. and China, and what kind of potential opportunities may come. Great opportunities? Again, any kind of opportunity we're interested in looking at, I'd always look at that broadly. Any kind of opportunities that have a high certainty of providing better returns we’ll look at. I don't have anything specific to mention right now; I would just say that we are always on the lookout to identify opportunities to deploy our capital wisely.

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

Hi, thanks. I wanted to follow up on loan growth C&I growth. You mentioned it turned positive in September and momentum continued into year-end. You also mentioned that pipelines have positive momentum, but you also mentioned to expect slower growth and C&I in the first half of 2021 versus the second half. Should we expect similar C&I growth in the first half of 2021 versus the annualized growth in the fourth quarter, of course, on an X PPP basis, and then a further pickup in the second half from there?

No, as I mentioned, I think that maybe in one of the Q&A earlier. Our fourth-quarter annualized growth rate was 18%. If you look at the second half of the year, the annualized growth rate was about 7% for C&I. So we're using the 7% run rate as what we expect for the year. We think the first quarter and two, we wouldn't expect business to be coming back as business as usual as strong, but I would expect that after summer, or after summer, business is going to come back stronger as the majority of the economy gets back to normal. That being said, we do have a strong pipeline. Many of these new bookings are long-term duration loans, and have gone unused. So we are looking for a good opportunity to see how that can support our expected loan growth.

Thanks for that, very helpful. Shifting to a question on credit, the oil & gas portfolio, classified loans were $240 million down 13% so clearly expressing easing in this portfolio. Would it be fair to say that the base case is for continued improvement in the oil & gas portfolio, that there is 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 chop the reserve ratio at year-end compared to September 30. Given the conditions improving, I believe the provision release is within the realm of possibility.

Thanks very much.

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. Thank you all for joining our call today. We are looking forward to talking to you in our next call in April. Bye-bye.

This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.