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East West Bancorp Inc (NASDAQ:EWBC)
Q1 2020 Earnings Call
Apr 23, 2020, 11:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to East West Bancorp's First Quarter 2020 Earnings Call. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. I would now like to turn the conference over to Julianna Balicka, Director of Strategy and Corporate Development. Please go ahead.

Julianna Balicka -- Director of Strategy and Corporate Development

Thank you, Eric. Good morning and thank you everyone for joining us to review the financial results of East West Bancorp for the first 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 Form 10-K for the year ended December 31st, 2019.

In addition, some of the numbers referenced on this call pertain to adjusted numbers. Please refer to our full year 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 we will also be available in replay format on our Investor Relations website.

I will now turn the call over to Dominic.

Dominic ng -- Chairman, President and Chief Executive Officer

Thank you, Julianna. Good morning. Thank you everyone for joining us for our first quarter 2020 earnings call. Before we go into our financial results, let me take a moment to express that our thoughts are with those who are affected by COVID-19 and thank all the front line and essential workers for their resilience and perseverance through this difficult time.

We, at East West, recognize that banking is an essential service, and we have been laser-focused on supporting our customers and the communities that we serve through these volatile and unprecedented situation.

As an organization, we quickly mobilized to ensure continuity of operations and to maintain the level of customer service and responsiveness that our customers have come to rely on. Our associates have stepped up to the challenge impressively, and I'm proud of their entrepreneurial spirit and engagement in helping businesses in need navigate these difficult times.

To ensure health and safety of our associates and customers, we implement enhanced safety measures and protocols and social distancing, first, in Greater China, and then in our domestic locations. About 60% of our 3,200 associates have jobs that can be performed remotely and they are currently working from home. Meanwhile, our frontline branch staff and operation support teams have been placed on rotation schedules or in split team arrangements as appropriate.

We reduced branch hours, temporarily closed geographically proximate locations, and are providing personal protection equipment such as masks, gloves, hand sanitizer, and wipes for our associates. For certain employees whose jobs that cannot be performed remotely, we added premium paid and enhanced benefits, to help them with any additional costs stemming from the pandemic such as child care or transportation.

Well, everyone is pitching in. For example with the Paycheck Protection Program, we pulled in associates from teams throughout the bank to increase our ability to underwrite and process as many applicants -- applications as possible, before initial program funding running out.

We funded more than $1.5 billion in loans for over 4,500 small to medium-sized business and non-profit organizations. By the way, it took East West Bank, a full decade to originate $1.5 billion in SBA loans. In comparison, we funded over $1.5 billion of PPP SBA loans in just two weeks. We had to, because funding these new loans so quickly will help save hundreds of thousands of jobs across the communities where we work and live.

My inbox is full of stories from these customers thanking East West for helping them keep their employees on the job. This extensive [Phonetic] monetary and fiscal support from the government is encouraging. In addition to PPP, we plan to participate in the Main Street lending program and other government support programs that may be implemented.

At East West, we have also taken other proactive actions in order to help our customers manage through the current crisis and reduce cash flows due to the stay at home orders. We are providing payment accommodations for impacted commercial and consumer customers. Our customers were thriving before this crisis, and we will help them thrive again, when the pandemic is over.

Now, I will move on to review our financial condition and the results of the first quarter. Let's go to slide number 4. In the first quarter, we earned net income of $145 million or $1 per share compared to fourth quarter net income of $188 million or $1.29 per share. The quarter-over-quarter decrease largely reflects an increased provision for credit losses in light of deteriorating macroeconomic conditions and outlook as a result of the COVID-19 pandemic.

We generated total revenue of $417 million and earned pre-tax, pre-provision income of $256 million equivalent to a pre-tax, pre-provision profitability ratio of 2.3% in the first quarter. An important variable helping us consistently generate attractive profitability is our industry-leading low-efficiency ratio. In the first quarter, our adjusted operating efficiency ratio was 38.5%. Our first quarter 2020 return on assets was 1.3%, return on equity was 11.6%, and return on tangible equity was 12.9%.

Moving onto slide number 5. From the enterprise risk management perspective, we are entering the crisis from a position of strength. Our balance sheet is strong. We have high levels of liquidity and capital, and our loan and deposit portfolios are well diversified. In the first quarter, we grew total loans by 13% annualized and deposit by 15% annualized.

Our loan to deposit ratio as of March 31st, 2020, was 92.8%, stable relative to the past several quarters. As we have said before, we consider a range of 90% to 95% to be a comfortable operating range, balancing considerations of on-balance sheet liquidity with profitability.

The allowance coverage of our loans is strong and additionally, this quarter, we increased it to 1.55%. Furthermore, we have ample liquidity and available borrowing capacity to fund loans for our customers, if it is ever needed. As of March 31st, our unused available borrowing capacity was $13 billion, which is sizable, compared to our balance sheet size of only $46 billion.

You can see on slide 6 that East West capital ratios are strong. In fact, we have some of the highest capital ratios among regional banks. This quarter, we took some actions to return capital to our shareholders since our announcement of a stock repurchase program in early March, through March 16, we repurchased $145.9 million or 4.5 million shares of common stock.

In addition, East West Board of Directors has declared second quarter 2020 dividends for the Company's common stock. The common stock cash dividend of $0.275 is payable on May 15th, 2020, to stockholders of record on May 4th, 2020. Our strong pre-tax, pre-provision income and capital levels allow us to maintain our dividend even in light of the challenging economic conditions.

Moving on to slide 7. As of March 31st, total loans reached a record of $35.9 billion, an increase of $1.1 billion or 13% linked quarter annualized. Average loan of $35.2 billion grew by 9% linked quarter annualized. End of period loan growth was driven by all three of our major loan portfolios: C&I, commercial real estate, and residential mortgage.

Average loan growth in the quarter was driven by CRE, which grew 17% linked quarter annualized, and by residential mortgage, which grew 12% linked quarter annualized. Both of these portfolios grew evenly throughout the quarter and growth has continued into April as loans previously in the pipeline continued to close.

On the other hand, average C&I loans decreased by 2% linked quarter annualized, as C&I loan growth was back-end loaded in March. We saw increased line utilization in our C&I portfolio this quarter. As of March 31st, 2020, our C&I line utilization was 75% which increased from 71% as of December 31st, 2019.

Our Greater China portfolio was $1.4 billion as of March 31st and it decreased by $104 million from year-end. So far, credit concerns resulting from COVID-19 pandemic as well as requests for loan forbearance have been very limited. Credit quality in that portfolio remained stable, and we are being prudent about loan growth at this point. Continuing on to slide 8, we added a more detailed breakdown of our C&I loan portfolio.

The largest segments within C&I are General Manufacturing & Wholesale, oil and gas and private equity, all of which are equivalent to 4% of total loans, followed by entertainment, which is equivalent to 3% of total loans. Our C&I exposure to travel and leisure, hospitality, restaurants and restaurant supply, all combined together represents less than 1.5% of our total loan portfolio.

We don't believe they are material credit concerns in these segments. Our oil and gas exposure as of March 31st was $1.4 billion of loans outstanding and $1.8 billion of total commitments. Based on commitments, 64% of our exposure is to customers in exploration and production, 27% to midstream and downstream clients, and 9% to oilfield services and other.

The composition of our clients, E&P production is 61% oil, 29% gas and 10% natural gas and liquids. The majority of the E&P production loans are hedged for 2020 and some of them are hedged even through 2021.

In light of the volatile market conditions for oil and gas, we increased our reserve coverage against portfolio to approximately 8%. On slide 9, 10 and 11, we have added additional details about our commercial real estate portfolio. Our CRE portfolio of $14.2 billion is well balanced across the major property types of retail, multifamily, office, industrial and hospitality. Construction and land exposure for us is very small.

The geographic distribution of our portfolio generally reflects our branch footprint. You can see on slide 10, that the weighted average LTV of our portfolio is 51%, and that along with an LTV of over 70% make up only 5% of the total portfolio. In the chart on the right hand side, you can see that the weighted average LTV of our loans are consistent by property type.

We have a long history of low credit losses in our multi-family and income producing CRE portfolios. Through many credit cycles, over the decades, and the consistency of our low LTV underwriting is an important contributing factor. On slide 11, we have included additional information about our hospitality, retail and construction and land portfolios. Again, the geographic distribution of these portfolios generally follows the geographic footprint of our branches, with the largest concentrations in southern and northern California.

High percentage of our borrowers have substantial network [Phonetic], provide us with personal guarantees and put substantial equity into their buildings or projects. We partner with experienced operators, investors and developers and many of our customers who have long-term relationship with East West spanning decades and multiple financing collaborations. Weighted average loan to value on our hospitality portfolio is a low 49%. 57% of full-service hotels, and 37% are limited service hotel.

A great majority of our hotels are in primary markets, many are flags -- are franchises. Weighted average LTV on our retail portfolio is also a low 49%. 52% is in small strip centers under 30,000 square feet in size. This is also reflected in the low average loan size of $2.1 million for retail CRE.

Restaurants makes up -- make up 6% of retail CRE and have an average loan size of little under $1 million and an average LTV of 53%. The vast majority of our retail CRE borrowers also provide personal guarantees to help support these credits. Construction and land exposure for us is very small and is well diversified by property type with a weighted average LTV, a low 54% based on commitment.

Moving on to slide 12, you can see the geographic distribution of our residential mortgage portfolio, which similar to CRE follows [Phonetic] our branch footprint. Our residential mortgage are primarily originated via our [Technical Issues] branches and they are local networks of real estate professionals. The average loan size in our portfolio is only $380,000 and only 6% of our loans have an LTV over 60%. For [Indecipherable] Low LTV Single-family mortgage portfolio, we have a long history of low credit losses.

In the first quarter, we originated $640 million of residential mortgage loans, which is on par with the origination volume in the fourth quarter of last year. The origination mix in the first quarter was evenly split between fixed and variable-rate loans, consistent with recent quarters.

We saw an increase in refinance transactions, which increased to 62% of origination volume in the first quarter, up from a recent run rate of 50%. For your information, we recently migrated our process, so that over 90% of our mortgage originations are now received digitally, allowing low loan production to continue in April, despite the impact of stay at home orders.

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

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Thank you, Dominic. Turning to slide 13 for a review of our allowance for credit losses and slide 14 for a review of our other asset quality metrics. At March 31st, our allowance for credit losses totaled $557 million or 1.55% of loans held for investment compared to $358 million or 1.03% as of December 31st, 2019.

Quarter over quarter, the loan reserve increased by $199 million including $125 million from the adoption of the new current expected credit-loss model or CECL, accounting standard on January 1st, which increased the reserve coverage on loans to 1.37% [Phonetic], up from 1.03%.

During the first quarter of 2020, we booked $74 million provision for credit losses, which increased reserve coverage to 1.55% reflecting the deteriorating macroeconomic conditions and outlook as a result of the COVID-19 pandemic. We attribute 77% of provision expense in the first quarter to reserve build, and 23% to the $1.1 billion net loan growth in the quarter.

The Moody's economic scenarios inform the three models we use to calculate our CECL reserves and as of March 31st, our reserve reflects our best estimate of the future economic environment and our expected losses for [Technical Issues]. Furthermore, given the strength of our capital and pre-tax, pre-provision earnings levels, we have the capacity to manage any losses that might be above the level of allowance as of March 31st, 2020.

Turning to slide 14, you can see that outside from the increase to the reserve in the first quarter, the impact of the pandemic crisis is not yet evident in our other asset quality metrics as of March 31st, 2020 and they remained strong. Net charge-offs in the first quarter were a low $900,000 resulting in a net charge off ratio of 1 basis point of average loans annualized.

During the quarter, gross charge-offs of $13 million primarily from C&I loans were almost entirely offset by recoveries, $10.2 million from total CRE and $1.6 million from C&I. C&I charge-offs in the first quarter were primarily from our oil and gas portfolio, on loans previously identified as substandard, which had been reserved for in full as of December 31st, 2019. The criticized to total loans ratio was 2.78% as of March 31st, ticking down by 3 basis points from 2.81% as of December 31st, 2019.

The classified loan ratio decreased to 1.25% of total loans as of March 31st, down by 7 basis points from 1.32% as of year end. Non-performing assets as of March 31st, 2020 were $151 million or 33 basis points of total assets compared to 27 basis points of total assets as of December 31st, 2019, and 31 basis points of total assets as of March 31st, 2019. During the quarter, OREO assets increased by $19 million, as we took possession of a retail commercial real estate property located in Southern California after over a decade of litigation.

Now, moving to slide 15 for a discussion of deposits. Total deposits grew to a record $38.7 billion as of March 31st, 2020, an increase of $1.4 billion or 15% linked quarter annualized. Average deposit of $37.5 billion grew $64 million or 1% linked quarter annualized. Average deposit growth for the first quarter primarily came from money market and non-interest bearing demand accounts offset by a decrease in interest-bearing checking.

In the second quarter, our funding costs will continue to benefit from the repricing of maturing time deposits. As of March 31st, 2020, we have $3.6 billion in time deposits maturing in the second quarter at a weighted average rate of 1.53%. In the third quarter of 2020, we have another $2 billion maturing at a weighted average rate of 1.57%, followed by $1.4 billion maturing in the fourth quarter at a weighted average rate of 1.44%.

For a context, we originated and renewed $700 million of time deposits month-to-date in April at a rate of 40 basis points compared to $1.6 billion in March at a rate of 83 basis points and $1.5 billion in February at a rate of 1.21%. The month-over-month decline in time deposits reflects the changes we have made to our deposit pricing resulting from the 150 basis points of Fed funds rate cuts in March.

And now, moving on to a discussion of our income statement starting with slide 16. We will review the components of the income statement in subsequent slides as well. The effective tax rate was 12% in the first quarter, compared to 14% in the fourth quarter. Weighted average diluted shares increased -- decreased by 1% due to share repurchase activity during the first quarter.

Given the current volatility and uncertainty about the length of time that the COVID-19 crisis will last, and the consequent widespread and sustained impact to the economy, we will be spending the publishing of our 2020 full-year management outlook.

With that said, with our strong capital position, strong allowance for credit losses combined with proactive management to minimize credit exposures, and to control operating expenses, we are confident that we will emerge from this crisis stronger than ever. Once we have more visibility, we will resume guidance.

On slides 17 and 18, we will review our net interest income and net interest margin. First quarter 2020 net interest income of $363 million decreased by 1% linked quarter. The first quarter net interest margin was 3.44%, a contraction of 3 basis points from the prior quarter. Against the backdrop of materially lower interest rates during the first quarter, the clients and earning asset yields were largely offset by decreases in the cost of funds.

The quarter-over-quarter change in our net interest margin is as follows: 11 basis points decrease from lower loan yields, including fees, recoveries, and discounts; a 1 basis point decrease from lower yields on other earning assets; a 3 basis point decrease from balance sheet mix shift, all of which were partially offset by 12 basis points increase from lower funding costs.

Continuing to slide 18, the average loan yield in the first quarter was 4.71% down 20 basis points from the prior quarter. Month-over-month between March and February 2020, the monthly average SFR loan yield was essentially unchanged, monthly average C&I loan yields compressed by about 30 basis points and CRE about 50 basis points.

As of March 31st, fixed-rate loans and hybrid loans, still in their fixed rate -- still in their fixed period, made up 31% of our total loans, 34% of our loans were linked to one month and three-month LIBOR rates and 29% were tied to the prime rate.

The first quarter 2020 average cost of deposits decreased by 12 basis points linked quarter to 82 basis points and the average cost of interest-bearing deposits decreased by 17 basis points to 1.17%. As of March 31st, 2020, our end of period cost of total deposits was 58 basis points, down 28 basis points from February 29. Month-to-date as of April 21st, our cost of total deposits decreased another 7 basis points to 51 basis points.

As of March 31st, 2020, our end of period cost of interest-bearing deposits was 84 basis points, down 39 basis points from February 29. Month-to-date as of April 21st, our cost interest-bearing deposits further decreased 6 basis points to 78 basis points.

Now turning to slide 19. Total non-interest income in the first quarter was $54 million, a decrease of 14% compared to $63 million in the fourth quarter. The driver of the quarter-over-quarter decrease was a negative $7 million credit valuation adjustment largely related to customer interest rate swaps resulting from the movement in rates as of March 31st, 2020, compared to December 31st, 2019.

Fee income and net gains on sales of loans of $54.4 million in the first quarter were up $2 million or 4% from the fourth quarter. Customer-driven interest rate contract revenue was stable quarter-over-quarter at $14 million. In other fee income categories, quarter-over-quarter foreign exchange income of $8 million increased by $2 million, wealth management fees of $5 million increased by $1 million and lending fees of $16 million decreased by $1.5 million.

Moving onto slide 20, first quarter non-interest expense was $179 million, a decrease of 7% linked quarter, and 4% year-over-year. Excluding the amortization of tax credit investments and CDI, our adjusted non-interest expense was $161 million in the first quarter, a decrease of 3% quarter-over-quarter and flat year-over-year.

The largest linked-quarter change was a decrease in other operating expenses resulting from lower travel expenses, advertising, and promotions. First quarter compensation and employee benefits expense was $102 million, an increase of 1% quarter-over-quarter due to seasonally high payroll expenses in the first quarter and essentially flat year-over-year. Our first quarter adjusted efficiency ratio was 38.5%.

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

Dominic ng -- Chairman, President and Chief Executive Officer

Thank you, Irene. For more than four decades, East West has weathered various credit cycles and macroeconomic environments, emerging stronger on the other side of them every single time. I believe that with our strong capital, liquidity position, and our loyal customer base, we are entering this cycle from a position of strength.

During these unprecedented times, we continue to be focused on the most important task at hand for us, helping our customers navigate the challenges ahead, so that they can thrive when this crisis is resolved.

I have never been more proud of our associates for going above and beyond demonstrating our East West culture and values, and I wish to thank all of them for their dedications and commitment. I will now open the call to questions. Operator?

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Our first question today will come from Ebrahim Poonawala. Please go ahead with your question.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Good morning.

Dominic ng -- Chairman, President and Chief Executive Officer

Good morning.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

I guess, I just wanted to touch upon credit in terms of, so you made some good points around capital strength, the earnings power. When you look at the loan loss reserves at 1.55% at the end of the quarter, I was wondering if you can talk about what was -- I think you mentioned like Moody's scenarios were peeked in, as you sort of updated for CECL reserves. What are you assuming in that 1.55% reserve in terms of the shape of the recovery, your loss rates? If you can speak to that. And in particular, Dominic, I would really love some color around the energy book, the entertainment book; because those are two where there's a little bit high degree of concern around what -- how the losses might transpire or so?

Irene H. Oh -- Executive Vice President and Chief Financial Officer

So Ebrahim, I'll start with kind of our allowance methodology. For East West, we had utilized Moody's for our stress test and that involved with CECL, and the scenarios and the models that we use to develop our 3/31 CECL reserve were what Moody's published on 3/27. So the shape of that is, and you know, if we're going with letters, U-ish.

And then that's what we'll kind of continue to look at. As I mentioned in my prepared remarks, we have three different models for CRE, C&I, and then single-family and with the Moody's scenarios as a backdrop we've also layered in our loss experience that we've had and certainly other factors where we look at the portfolio to ensure that we have appropriately reserved for any risks that we see.

Dominic ng -- Chairman, President and Chief Executive Officer

So on the question on what are the portfolio that you would like me to highlight again?

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Okay. So two things, just with the C&I book, I said energy and entertainment.

Dominic ng -- Chairman, President and Chief Executive Officer

Okay.

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

And if there is anything else that you are particularly worried about Dominic, that would be great.

Dominic ng -- Chairman, President and Chief Executive Officer

Okay. So energy and entertainment, double E. Okay. What I would start with, just with the energy. We shared with you earlier about we have $1.4 billion of energy loans outstanding. The vast majority of them are the E&P reserve lending, which obviously we were very much focused on doing more reserve lending, because if you look back several years ago, reserve lending was high collateral, value tend to not have as much losses and the losses that happened a few years ago were mainly in the oil services and some of the downstream and so forth.

But in this cycle, things are a little bit different. Obviously, we see what the price deck looks like and what's happening on a weekly basis if we checked out on the oil and gas prices, that obviously do not look very good even for the E&P production loans.

But yes, I said earlier, the majority of our customers do have hedges in place and for 2020 some of them even extend beyond 2021, we'll see how much of those price depression will continue. I mean if it is lingered on, well beyond 2020 obviously many oil and gas loans, like many other banks will have these challenges. If it's just temporarily for a few months and then somehow it comes back stronger again, or for whatever reason there are any kind of government stimulus programs that potentially can support it, that would change the dynamic.

We don't know at this point. So all we can do is that with the best estimate and being a little bit more conservative and provide as much reserve as we feel is necessary and that's why we set aside 8% for this portfolio.

Moving on to entertainment. I feel very comfortable with the entertainment portfolio today. When we first started eight, nine years ago, many of our entertainment loans were for theatrical release production financing, well-collateralized rights, foreign distribution rights, tax credit, and so forth.

Today, most of our lending when it comes to content development production, are for streaming. It goes to Netflix, to Amazon, Apple, etc. In fact, our entertainment lending in China predominantly to stream a television production and Internet streaming companies contract and so forth.

So we do not have much exposure at all. We have no exposure to theaters. We have no exposure, very, very few exposure with movies, and even with the movies, they are fully collateralized and already have completed with distribution rights and tax credit and so forth all available. So we feel that currently, we are in a pretty good shape when it comes to the entertainment business.

So anything else that you would have any concern if you would like to ask in terms of the C&I portfolio?

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

So -- only, just a follow-up to that, Irene should we expect or what level of reserve bill should we expect from here, if you can talk to that. And thanks for taking my questions.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Yeah, Ebrahim, I think that is the question of the earnings season for us and other banks. Honestly at this point and that's why we kind of had discontinued providing guidance, we simply do not have a lot of clarity on that and to even give a range. We want to make sure that we're reserving the appropriate amount, given the risks in our portfolio, and we'll evaluate, and certainly, as we continue on in the quarter we'll continue to look at our portfolio to see what's appropriate and book the amount that we think we need to.

Operator

Thank you. Our next question will come from Ken Zerbe of Morgan Stanley. Please go ahead with your question.

Ken Zerbe -- Morgan Stanley -- Analyst

Great, thanks, good morning.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Good morning, Ken.

Ken Zerbe -- Morgan Stanley -- Analyst

I certainly appreciate all the -- I do appreciate all the new information that you've given us especially on slide 18 in terms of what's sort of your current rates. But is there a way you can just sort of combine all those for us. I know you're not giving guidance necessarily, but if we kind of strip out the PPP program, and just really look at the core portfolio, like how do you envision sort of the net impact of all the deposit and asset changes in terms of your net interest margin going into second quarter?

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Well, I want to clarify the impact of PPP wasn't in for the first quarter. So that will be really a new development for the second quarter. Certainly with kind of where the Fed funds rates are and also longer-term rates, we do expect that the margin and the loan yields will come down. We're doing our darnedest to make sure on the funding side and on the deposit side, we're lowering rates. That's why we've provided all that transparency Ken about the CDs as well and we're pricing downward of that.

Dominic ng -- Chairman, President and Chief Executive Officer

The second quarter also will be an unusual quarter, of course, we already booked $1.5 billion of C&I loans to the PPP program. So it is not usually a normal quarter. And we, I mean, once the second program started we start booking some again. And so clearly I wouldn't count that as our normal way of originating C&I loans.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

You know, I don't think we had in our prepared remarks, so I'll just share that the processing fee income that we expect from the $1.5 billion that we booked is about $40 million.

Operator

Our next question will come from Michael Young of SunTrust. Please go ahead with your question.

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Hey, thanks for taking the question. Wanted to just ask, on the expense side, obviously good operating efficiency again, but as revenue maybe falls depending on the PPP program should we expect that same level of efficiency going forward, and were there any kind of one-time expenses or true-ups this quarter that may not repeat going forward?

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Yeah. So, the efficiency ratio will certainly be a function of the revenue number. When we look at the actual expense during the quarter, I would say there isn't anything that unusual. We are doing our jobs as a management team to ensure that we are looking at all the expenses very carefully. In any environment we do that, but certainly now. First quarter there's always some seasonality with payroll costs. So that's probably about $3 million increase in first quarter, but year-over-year pretty comparable.

Operator

Our next question will come from Jared Shaw of Wells Fargo Securities. Please go ahead with your question.

Jared Shaw -- Wells Fargo Securities -- Analyst

Hi, good morning.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Good morning, Jared.

Jared Shaw -- Wells Fargo Securities -- Analyst

Just looking at growth, you had a great growth in C&I this quarter and then you have the PPP loans coming on and the good SFR growth. Should we assume that C&I is -- that this growth rate is a little more sustainable? I know, this is different from what you've had in the last few quarters or it seems like you've been de-emphasizing C&I? Is this more a function of just higher utilization from COVID or is this good sustainable growth at this point?

Dominic ng -- Chairman, President and Chief Executive Officer

Well, the PPP again is in the second quarter, right. So, clearly, I can expect second quarter is going to be a nice C&I growth, but if we go back to the first quarter. Clearly, the high utilization is a factor for our C&I growth. We do have new customers that we brought in from other banks and new deals that we worked on. And the first -- in January and February and a little bit, but when it comes to March, I think, I would say the majority of the growth comes from higher utilization from our customers. Private equity funds that just wanted to draw down a little bit more money from the commitment. So those are kind of things that are similar to other banks.

Operator

Our next question will come from Chris McGratty of KBW. Please go ahead with your question.

Christopher McGratty -- Keefe, Bruyette & Woods -- Analyst

All right, great, thanks, good morning.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Good morning, Chris.

Christopher McGratty -- Keefe, Bruyette & Woods -- Analyst

How are you doing? I want to come back to a prior question on the margin, just to make sure I'm conceptually thinking about it. If we exclude the impact of PPP, my memory serves me, and correct me if I'm wrong, that each cut by the Fed was around 10 basis points to NIM. So with six cuts, some pretty meaningful potential offset. And I know you guys are being aggressive on the deposits. But is that the right way to think? I'm just trying to get a sense of how much of the loan yields have yet to reprice given the dynamic with Fed funds and floors and so maybe you could just open up about that, that would be great.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Yeah. So a lot of our -- normally we provide as part of our investor relations deck kind of the breakdown of our loan book by index and how much is fixed and we can share that with you afterward. It's not part of our earnings release deck this quarter.

The composition hasn't really changed. So if you look at that, a lot of the C&I loans, vast majority, and then also the CRE loans, have repriced at the end of the quarter. So when we look at really where the opportunities are, one, mix [Phonetic] change. We also with the kind of the volatility and where rates were, took advantage and entered into some lower cost kind of pay fixed swaps to kind of help reduce our funding costs as well.

So there are some -- there are things that we've taken -- done to take advantage of kind of the dislocation in the market and to help as far as on the funding side. Kind of to add to my earlier kind of prepared remarks, I think our opportunity really is on the cost side of what we can do to lower that in a more rapid pace, right.

But you know, I think if, you know, round numbers here if we look at it ex-PPP, we do think that the NIM can go to a little over 3% because of our ability to take down the deposit costs and will outperform let's say 10 basis points over 25 basis points rate cuts.

Operator

Our next question will come from Brock Vandervliet. Please go ahead with your question.

Brock Vandervliet -- UBS -- Analyst

Thanks very much. Good morning. Just a follow-up on an earlier expense question. Do you kind of view this as, I know you're looking at expenses all the time, but do you view this dislocation as exactly that or something that may be more lasting and warrants a harder look on the expense side?

Dominic ng -- Chairman, President and Chief Executive Officer

Well, I think that no one really knows this pandemic. In fact, that's the reason why most banks are not providing guidance because we really don't know how is it going to turn into, I mean is it going to be sitting at home for another month or so, or is that sitting at home for another three months, and when the economy do come back, is it a V-shape or a U-shape. To what extent people can, some industries have a hard time to come back, because of lifestyle changes and so forth.

There are many, many, many questions out there, that people would need to ask. And then how this economy would turn into after the pandemic. And no one knows. I mean we are -- we have the opportunity to look at what's happening in China, because our Greater China team start dealing with the pandemic in late January, when it was a pretty much a whole country complete shutdown and for an extended period of time, we saw that the factory workers all going back to work, banking is more or less now getting back like usual, but then there are still certain type of business are not doing as well like others.

So we're going to need to look at what's going to happen in US, because US is not China. So behavior are going to be different. At this stage, I think you can sort of like rest assure East West has always been very proactive in managing our business. So if we feel it is appropriate to take a much more aggressive reduction of expenses, we would definitely be looking actively into it. And if we see that it's something that we are not sure whether it is temporary or permanent. I think that we would not be unwise to start ticking down, let's say certain [Phonetic] infrastructure to hurt our long-term growth opportunity.

We're always nimble. While we're always nimble and we move really, really fast, the fact is, we are much more long-term driven in terms of looking into sustainable profitable and enable growth in the long run more than just any kind of quarter by quarter kind of results.

So that's the kind of philosophy we have, and that's what we're going to do and watching it on a daily, weekly basis and see what we need to do.

Operator

Our next question will come from Lana Chan of BMO. Please go ahead with your question.

Lana Chan -- BMO Capital Markets -- Analyst

Hi, good morning. I wanted to see if you could give us how much of your loans has had payment deferral so far.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Sure, Lana. If I look at the numbers here, it will all start with C&I and commercial real estate or commercial loans. As of 3/31, the actual modifications and forbearances were actually pretty low, about $80 million. As of today, we probably doubled that, so $160 million.

I would share though on top of the $160 million, there are probably another $400 million as far as loans where we're having conversations with borrowers, who have asked for some sort of modification. I will also add that in the month of March, we wanted to make sure that we could help our business customers, particularly the small business customers who are suffering with the shut-ins and the frenetic nature of things then.

And then we did offer a kind of accommodations for them largely to help them given the frenetic nature of what was happening more so than from a perspective of concern about the cash flow. So that's something that we also did as well. So those numbers are a little bit higher, but it was short-term in nature.

On the single-family side, we have also and we are in states where there are a lot of kinds of other programs from governors as far as modifications are put in place. If we look as of 3/31, the total amount of deferred payments was about $7 million on a balance of approximately $400 million. I don't have that specific today, but certainly, those numbers have come up from there.

Operator

Our next question comes from Gary Tenner of DA Davidson. Please go ahead with your question.

Gary Tenner -- D.A. Davidson -- Analyst

Thanks, good morning. Just wondering if you could just talk about how you're planning to fund the PPP loans. Will it be through a balance sheet liquidity or through one of the programs?

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Yeah. At this point in time, we have strong deposits and we are funding the PPP program through our liquidity that we have. We do expect though that we would likely, we filed the paperwork will likely with those loans pledge them and use the PPPL program to fund part of it.

Operator

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

David Chiaverini -- Wedbush Securities Inc. -- Analyst

Hi, thanks. So, I had a follow-up on slide 18 where you provided the spot rates on deposits. I was wondering if you could provide the spot rate on loans. And then, I had a follow-up on the loan modifications and deferrals. How far out are you going? Are you doing three months, and are you willing to go further if the lockdowns persist?

Irene H. Oh -- Executive Vice President and Chief Financial Officer

So I'll start with forbearances and the modifications. For single-family, most of the ones that we have done are three and that will roll about forward to another three if the borrowers need it. On the commercial side, it varies much more so. But at this point in time, I don't think we've done any modifications or have any plans here that are beyond six months.

Certainly, if the customer needs it, if the environment is very different, we will extend that out and we're very flexible as far as from the perspective of what we need to do to limit our loss content. On the spot rate of the loans as of -- for '21, I don't believe I have that information in front of me, Dave, but Julianna and I can get that for you after the call.

Dominic ng -- Chairman, President and Chief Executive Officer

I want to add also for these like single-family mortgages and because the LTV is so low, as I highlighted earlier that we actually only have 6% of our customers in the single-family mortgage portfolio that have more than 60% LTV. So it is actually quite comfortable to make any kind of payment deferral arrangement, because if we take on these additional deferral, and the LTV would still be extraordinary low, so the loss likelihood is zero.

And we are very, very similar situation for our commercial real estate, obviously with that very, very low LTV again, all across the board. Again, any kind of deferral if we need to make it really doesn't make any difference in terms of potential losses going forward. So we are very, very comfortable about working with these customers to help them on this temporary transition. And frankly, many of our commercial customers in the let's say in hotels and hospital -- in the restaurant business, do get PPP, so that they will be able to get by with the PPP funding for the next two months or so.

So hopefully, they would not even need to get much help from us, we'll see.

Operator

[Operator Instructions]. Our next question comes from Dave Rochester of Compass Point. Please go ahead with your question.

David Rochester -- Compass Point esearch and Trading, LLC -- Analyst

Hey, good morning guys.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Good morning, Dave.

David Rochester -- Compass Point esearch and Trading, LLC -- Analyst

I appreciated all the color on some of the social distancing exposures in the deck. I was just wondering if you had your total for leveraged loans as well? And then just a follow-up on energy credit, how far along are you guys in that spring redetermination process? And how much are you seeing those lines come in as a part of that and where is your price deck now? Thanks.

Irene H. Oh -- Executive Vice President and Chief Financial Officer

So Dave, I'll start with the leverage lending exposure as of 3/31, we had about $1 billion in leverage lending and historically, and kind of related to that, we've had a Term B portfolio and that as of 3/31 was $960 million. Obviously, the leveraged lending of the Term B portfolio correlates quite a bit together.

On the energy loans and kind of the spring redetermination, we started that process from our conversations and the feedback we were getting from the team, where -- and the evaluation that we're doing, about 20% in. Some of those lines certainly have been cut or -- and we expect that, that will continue.

Operator

Our final question today comes from Lana Chan as a follow-up with BMO. Please go ahead with your question.

Lana Chan -- BMO Capital Markets -- Analyst

Hi, thank you. I just wanted to follow-up a bit about plans for continuing with the stock buyback, given the COVID situation.

Dominic ng -- Chairman, President and Chief Executive Officer

Well, we obviously have plenty of capital, in fact, and so finally, I think in early March, we made the announcement of the buyback program. It didn't last long, because by the time we have -- got through, less than two weeks, is earnings period coming soon. So we are in a dark period, and then wasn't able to execute.

But in the meantime, right around the same time, we all got locked down and sat at home. So from that perspective, I think that we will continue to evaluate with our Board, I mean we already got the authorization of $500 million. We have only used $100-some-odd-millions. We still have plenty of capital. And so, but at this stage right now, we will continue to evaluate and then that -- we feel that, the stock price is at the level that want for us to potentially do more buyback, we would definitely consider that.

And so we'll just take it week by week and then look at the market condition and then go from there. I think the beauty is that we have the ability to do it and we have plenty of capital to do it, and -- but, we also don't have to do it because our profitability is still pretty strong right now.

Operator

This concludes our question-and-answer session. I would now like to turn the conference back over to Dominic for any closing remarks.

Dominic ng -- Chairman, President and Chief Executive Officer

All right. Once again, I want to thank every one of you getting on the call. I know it's a very challenging time for a lot of people due to the pandemic that's going on and affecting people's lives. And we hope that in July when we have our calls, everything get back to a little bit more than normal.

Hopefully, at that time we have a much more positive conversation, we can talk about. Looking forward to talking to all of you in July. Thank you.

Operator

[Operator Closing Remarks].

Duration: 58 minutes

Call participants:

Julianna Balicka -- Director of Strategy and Corporate Development

Dominic ng -- Chairman, President and Chief Executive Officer

Irene H. Oh -- Executive Vice President and Chief Financial Officer

Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Michael Young -- SunTrust Robinson Humphrey -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

Christopher McGratty -- Keefe, Bruyette & Woods -- Analyst

Brock Vandervliet -- UBS -- Analyst

Lana Chan -- BMO Capital Markets -- Analyst

Gary Tenner -- D.A. Davidson -- Analyst

David Chiaverini -- Wedbush Securities Inc. -- Analyst

David Rochester -- Compass Point esearch and Trading, LLC -- Analyst

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