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East West Bancorp Inc (NASDAQ:EWBC)
Q3 2020 Earnings Call
Oct 22, 2020, 11:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day. And welcome to the East West Bancorp Third Quarter 2020 Earnings Call. [ Operator Instructions] [ Operator Instructions].

I would now like to turn the conference over to Julianna Balicka. Please go ahead.

Julianna Balicka -- Director of Strategy and Corporate Development

Thank you, Sarah. Good morning, and thank you, everyone, for joining us to review the financial results of East West Bancorp for the third 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 and 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 31, 2019. In addition, some of the numbers referenced on this call pertain to adjusted numbers. Please refer to our third quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures. 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. [ Operator Instructions].

I will now turn the call over to Dominic.

Dominic Ng -- Chairman, President and Chief Executive Officer

Thank you, Julianna. Good morning, and thank you, everyone, for joining us for our third quarter 2020 earnings call. I will begin with a review of our financial condition and results on slide three of this presentation. This morning, we recorded -- we reported third quarter 2020 net income of $160 million or $1.12 per share, up 61% from second quarter net income of $99 million or $0.70 per share. Our third quarter return on average assets was 1.26%. Return on average equity was 12.5% and return on average tangible equity was 13.9%. Our profitability rebound from the trough of the second quarter as provision for credit losses declined. Deposit growth this quarter was very healthy, with especially strong growth in noninterest-bearing demand accounts, which grew 28% annualized quarter-over-quarter based on period-end balances and 22% annualized based on average balances. As of September 30, we reached a record $41.7 billion in deposits, including a record $14.9 billion in demand deposit accounts. We generated positive loan growth also in the third quarter, reaching a record $37.4 billion in loans as of September 30, 2020, despite a challenging backdrop of slow economic activity due to the COVID-19 pandemic.

The biggest driver for the quarter-over-quarter increases in net income was a reduction in the provision for credit losses, which was $10 million in the third quarter compared to $102 million in the second quarter. In the first half of the year, we recorded $176 million in provision for credit losses compared to net charge-offs of $20 million, substantially building our reserve level. Based on an improved macroeconomic outlook, we modestly decreased our allowance for loan losses as of September 30. Overall, credit continues to be very manageable as demonstrated by net charge-offs at annualized 26 basis points of average loans. Also in the third quarter, we earned $219 million of pre-tax pre-provision income on total revenue of $374 million. Our pre-tax pre-provision profitability ratio was 1.74%. The steep decline in interest rates this year has impacted our revenue. However, as the downward repricing of our earning assets to benchmark rates is largely complete and we continue to reduce the cost of funds as maturing CDs reprice lower. We anticipate that our pre-tax preprovision income and profitability will stabilize going forward. Importantly, our efficiency remains industry-leading and is a key variable to maintaining above-average pre-tax preprovision profitability.

Efficiency ratio in the third quarter was 41.3%. Moving to slide four for a summary review of our balance sheet. Our balance sheet is strong. We have high levels of liquidity and capital. And as of September 30, 2020, we crossed over the $50 billion in assets milestone, ending the quarter at $50.4 billion. This translates to an organic compound annual growth rate of 10% over the past five years. Quarter-over-quarter, total loans of $37.4 billion increased $208 million or 2% linked quarter annualized. Total deposits of $41.7 billion increased $1 billion or 10% annualized. Our deposit growth is combination of onboarding new clients, expanding existing relationships and our clients maintaining high levels of liquidity. We believe the momentum of strong deposit growth can be sustained post pandemic. Due to our deposit growth this quarter, our loan-to-deposit ratio as of September 30 was 89.8% compared to 91.5% as of June 30. Now turning to slide five. You can see that East West capital ratios are strong and growing and are some of the highest among regional banks, particularly for common and Tier one equity. Our book value and tangible equity per share were both up 3% from the prior quarter, and our tangible equity to tangible assets ratio increased to 9.3% You can see from the chart that all our capital ratios increased quarter-over-quarter.

East West Board of Directors has declared fourth quarter 2020 dividend for the company's common stock. A common stock cash dividend of $0.275 is payable on November 16, 2020, to stockholders of record on November 2, 2020. Moving on to a discussion about loan portfolio, beginning with slide six. C&I loans, excluding PPP, were $11.5 billion as of September 30, or 31% of total loans. Total C&I commitments, excluding PPP, were $16.3 billion as of September 30, a quarter-over-quarter increase of 5% annualized. Month-over-month growth of loans outstanding turned positive in September, reversing a trend of negative monthly growth since March. Overall, C&I loans outstanding, excluding PPP, decreased by $144 million between June 30 and September 30, a decrease of 5% annualized compared to a decrease of 29% annualized in the second quarter. Moving to slide seven. As of September 30, our total commercial real estate portfolio was $14.7 billion or 39% of total loans. Total commercial real estate loans grew $171 million or 5% annualized from June 30.

The portfolio is well-balanced across the major property types of retail, multifamily, office, industrial and hotel. Our exposure to construction and land loan remain low at 1.5% of total loans. You can see on slide eight that the weighted average loan-to-value of our total commercial real estate portfolio is 51%, with an average loan size of only $2.4 million. Nearly 90% of our commercial real estate loans have an LTV of 65% or lower. In the chart on the right, you can see that the weighted average long-term values of our loans by property type range from 49% to 53%. On slides nine and 10 we provide additional details regarding our single-family residential loans and home equity lines. Combined, residential mortgage and other consumer loans make up 25% of our total loans. As of September 30, our single-family residential portfolio was $7.8 billion, up by $126 million or 7% annualized from June 30. In the third quarter, we originated $768 million of residential mortgage loans, consistent with the pace from the first half of 2020, and up by 19% year-over-year from the third quarter of last year. We expect a similar pace of origination for the fourth quarter.

The average loan size in our residential mortgage (sic) single-family portfolio is only $386,000 and the weighted average loan-to-value was 53%. Again, 90% of our residential mortgage loans have an LTV, loan-to-value, of 60% or less. On to slide 10. On December 30, we had $1.5 billion of home equity lines outstanding plus $1.6 billion in undisbursed commitments, translating into a utilization rate of 48%, unchanged from last quarter. Our equity lines outstanding increased $52 million quarter-over-quarter or 14% annualized, and total commitments increased 11% annualized. The average size of our home equity commitment is $367,000, and the weighted average combined LTV is only 48%. 97% of our home equity have an LTV, loan-to-value, of under 60%.

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

Irene Oh -- Executive Vice President and Chief Financial Officer

Thank you, Dominic. I'll start by discussing loans on COVID-19-related deferrals on slide 11. As of October 20, loans on full payment deferral were 1.9% of total loans. Including loans on partial payment deferral, certainly were modifications of principal and interest payment to interest-only, loans on deferral totaled 3.4%. Overall, 55% of commercial loans on deferral are still making partial payments. Quarter-over-quarter, loans on COVID-19-related deferral decreased close to 50% between June 30 and September 30 and decreased a further 20% month-to-date in October. The largest improvement was in residential mortgage deferrals, which decreased by 79% since June 30, reflecting the resiliency of the East West customer base. Similar to the second quarter, the deferral rate on C&I loans continue to be very low. Commercial real estate loans on deferral have also decreased, down to 6.6% as of October 20, comprised of 3.8% on partial payments and 2.8% on full payment deferral, largely reflecting the longer COVID-19 impact on cash flows for certain properties.

Turning to slide 12 for a review of our allowance for loan losses and slide 13 for a review of our other asset quality metrics. Our allowance for loan losses was $618 million as of September 30 or 1.65% of loans held for investment, modestly down from $632 million or 1.7% of loans as of June 30. Since January 1, post-CECL, our allowance increased $135 million, and the coverage ratio increased by 26 basis points from $1.39. The current macroeconomic forecast has improved, projecting less severe economic conditions compared to June 30. This in turn decreased the expected lifetime losses for the loan portfolio. The forecast-driven reduction to the allowance was partially offset by increased qualitative reserves for oil and gas and commercial real estate loans. The allowance coverage of our oil and gas portfolio was 10% as of September 30, up from 9% as of June 30.

Net charge-offs for the second quarter were just under $25 million and a net charge-off ratio was 26 basis points of average loans annualized. Charge-offs in the third quarter were primarily from oil and gas loans, which accounted for $22 million or 91% of net charge-offs, while charge-offs from other loan classes remain at low costs. Reflecting these drivers and assumptions, we recorded a $10 million provision for credit losses during the third quarter of 2020 compared to $102 million in the second quarter. Turning to slide 13. On this page, we detail out the components of criticized assets. Criticized loans were 3.9% of total loans as of September 30, totaling $1.5 billion. The largest concentration within criticized loans by either industry or property type remains oil and gas. Other criticized C&I loans are diversified by industry and the criticized commercial real estate loans are likewise largely diversified by property type. Special mention loans were 1.9% of total as of September 30 in the amount of $723 million, up from 1.5% of total loans as of June 30, an increase of 26%. The quarter-over-quarter increase in special mention loans was largely due to inflows from commercial real estate.

As of September 30, 10.5% of oil and gas loans, 2.8% of all other C&I loans and 2.1% of commercial real estate loans were graded special mention. Classified loans were 2% of total loans as of September 30 in the amount of $758 million compared to 1.8% as of June 30, an increase of 11%. The quarter-over-quarter increase in classified loans was largely driven by downgrades of oil and gas loans, followed by downgrades of all other C&I loans. As of September 30, 23.5% of oil and gas loans, 2% of all other C&I and 1.6% of commercial real estate loans were classified. Nonperforming assets were 52 basis points of total assets as of September 30, in the amount of $260 million compared to 41 basis points as of June 30, an increase of 29%. The quarter-over-quarter increase in nonperforming assets was primarily due to net inflows of previously classified oil and gas loans to nonaccrual status. Lastly, accruing loans 30 to 89 days past due were $85 million or 23 basis points of total loans as of September 30, a quarter-over-quarter improvement of 25% from $113 million or 30 basis points of total loans as of June 30.

As you can see in our credit quality metrics, outside of oil and gas, asset quality is improving across our other loan portfolios. In terms of oil and gas, I'd like to note that we continue to reduce our exposures through paydowns, workouts and charge-offs. Oil and gas loans outstanding are down 8% quarter-over-quarter and down 12% year-to-date. Including undispersed commitments, total oil and gas commitments are down 8% quarter-over-quarter and down 17% year-to-date. In terms of hedges in place for our E&P borrowers, 52% of their planned 2021 oil production is hedged and 59% of their planned 2021 gas production is hedged. And now moving to a discussion of our income statement on page 14. This slide summarizes the key line items of the income statement, which I will discuss in more detail on the following slides. Amortization of tax credit and other investments was $12 million in the third quarter compared to $25 million in the second quarter. T

He quarter-over-quarter change reflects timing of tax credit investments, and we expect this number to be approximately $20 million in the fourth quarter. The effective tax rate for the third quarter was 19%, up from 12% in the second quarter of 2020. The quarter-over-quarter increase in the tax rate reflects the increase in pre-tax income. Third quarter income before taxes was $196 million, a 75% increase from $112 million in the second quarter as we increased our estimate for the full year effective tax rate to 15%. The 19% effective tax rate for the third quarter included true-up to the higher full year effective tax rate. The effective tax rate in the fourth quarter should be close to the full year effective tax rate of 15%. I'll now review the key drivers of our net interest income and net interest margin on slides 15 through 18, starting with average balance sheet growth. Third quarter average balance -- third quarter average loans of $37.2 billion grew quarter-over-quarter. Growth in commercial real estate, residential mortgage and PPP loans was offset by a decrease in C&I bonds.

Third quarter average deposits of $41.2 billion grew 13% linked quarter annualized driven by strong growth in demand and checking accounts, offset by a reduction in high-cost time deposits. Average noninterest-bearing deposit accounts grew 22% linked quarter annualized and made up 35% of total deposits in the third quarter, up from 34% in the second quarter and 29% in the year ago quarter. With the strong deposit growth in excess of loan growth, the average loan-to-deposit ratio decreased to 90% in the third quarter, down from 93% in the second quarter. Excluding PPP loans, where we match-funded 75% with the PPPLF, the average loan-to-deposit ratio was 86% in the third quarter. Accordingly, average interest-bearing cash and deposits with banks increased by $1.5 billion in the third quarter and made up 10% of average earning assets, up from 8% in the second quarter. This growth in lower-yielding assets was a headwind to the net interest margin this quarter.

We continue to deploy excess liquidity into available for sale securities, but given the low interest rates and the flat curve, attractive opportunities are limited. In the current environment, we are comfortable in managing the balance sheet with a higher level of liquidity and recognize that when loan growth accelerates, as it is starting to, this headwind to the net interest margin will largely self-care. On slide 16, you can see that third quarter 2020 net interest income of $324 million decreased by $20 million or 6% linked quarter and a net interest margin of $272 million compressed by 32 basis points from the prior quarter. However, excluding the impact of PPP loans and the PPPLF, third quarter adjusted net interest income of $318 million declined by 2% or $5 million quarter-over-quarter, exhibiting relative stability. Third quarter adjusted net interest margin of $277 million compressed by 19 basis points from second quarter. PPP loan interest and deferred fee income was $6.5 million in the third quarter, down from $21 million in the second quarter.

The quarter-over-quarter fluctuation is due to changes we made to our estimate for expected forgiveness of PPP loans by the SBA, resulting in reduced deferred fee accretion for the third quarter. The quarter-over-quarter change in net interest margin breaks down as follows: negative 14 basis points from lower loan yields; negative six basis points from lower other earning asset yields; negative 12 basis points from excess liquidity, with higher balances of interest-bearing cash and deposits with banks; as well as a negative 13 basis points of impact -- negative impact from less PPP income partially offset by 12 basis points from a lower cost of deposits and one basis point from a lower cost of borrowings. Headwind have been deposit growth in excess of loan growth, the lack of attractive redeployment yields for excess liquidity. But we see several tailwinds that should improve the NIM and the net interest income going forward. For the fourth quarter of 2020, we anticipate that our GAAP net interest income will grow by 3% to 5% and that our GAAP net interest margin will range from 2.75% to 2.85%, including PPP income. The drivers for our net interest income and NIM outlook are as follows: First, continued reduction in deposit costs from the repricing of maturing CDs.

We have $1.4 billion in CDs at a weighted average interest rate of 1.45% maturing in the fourth quarter and another $1.3 billion at a weighted average interest rate of 1.26% in Q1 of 2021. Second, partial repayment of the PPPLF ahead of PPP loan forgiveness for our customers, a process that we have already begun. Month-to-date in October, we repaid $524 million. Also we expect to recognize $15 million of PPP loan deferred fee and interest income in the fourth quarter. And thirdly, general stability for loan yields as downward repricing of variable rate loans has largely run its course. Now turning to slide 17. Third quarter average loan yields of 3.60% contracted by 38 basis points from last quarter, reflecting down pricing of variable rate loans to benchmark interest rates as well as the reduced fee income accreted on PPP loans. Excluding the impact of PPP, the third quarter adjusted loan yield of 3.70% contracted by 20 basis points quarter-over-quarter. In the second quarter, the quarter-over-quarter contraction in the average loan yield, excluding the impact of PPP was 81 basis points. 65% of East West loan portfolio is variable rate.

And by now, these loans have largely repriced. Nearly 90% of variable rate loans we have are linked to benchmark interest rates with the duration of three months or less. In the upper right quadrant, we've laid out a new chart showing our average loan yields by portfolio. As you can see, our single-family residential mortgage product is a lease weight-sensitive portfolio and continues to carry attractive yields. To organically reduce asset sensitivity, we have been growing fixed rate loans, notably in single family. Year-over-year, fixed rate loans, excluding PPP, increased by 30%. Turning to slide 18. Against the backdrop of materially lower interest rates, declines in earning asset yields have been partially offset by decreases in the cost of funds. Our average cost of deposits for the third quarter dropped to 33 basis points, down from 47 basis points in the second quarter, an improvement of 14 basis points. The spot rate of total deposits as of September 30 was 29 basis points. Our third quarter average cost of interest-bearing deposits dropped to 50 basis points down from 71 basis points in the second quarter, an improvement of 19 basis points.

The spot rate of interest-bearing deposits as of September 30 was 46 basis points. In the lower left quadrant, we present our third quarter 2020 cost of deposit by deposit category compared to the cost of deposits in the third quarter of 2015, which was the last full quarter under a 0 interest rate policy before the Fed raised rates in December 2015. At that time, the average cost of deposits was 28 basis points and the average cost of interest-bearing deposits was 40 basis points. We included this chart in the deck as we have believed it provides additional context of the repricing lever within our cost of deposits. You can clearly see that our CD book has not fully repriced down to historic SERP levels. We expect to continue to reduce our average cost of CDs, maturing CDs over the next six months reprice lower, bringing the total cost of deposits down further. The rate paid on originations or renewals of domestic CDs in the third quarter of 2020 was 43 basis points, and the retention rate of branch CDs has been an excellent 92%. Quarter-to-date, rates paid on our CD originations and renewals have been lower than in the third quarter. Also as of yesterday, the spot rate for our cost of interest-bearing deposits is down to 42 basis points. And for our total cost of deposits, it's down 27 basis points. Moving on to fee income on slide 19. Total noninterest income in the third quarter was $50 million compared to $59 million in the second quarter.

Fee income and net gains on sales of loans was $48 million in the third quarter, down by $4 million or 8% quarter-over-quarter. Lending fees of $19 million decreased by $3 million, largely reflecting valuation changes from warrants received as part of lending relationships. Third quarter lending fees included $4 million from an increase in the valuation of warrants. In comparison, second quarter included $8 million from an increase in the valuation of warrants. Included in lending fees are customer-driven letters of credit fees, which increased quarter-over-quarter in parallel with increased customer activity. Reflecting an increase in the number of customer accounts and customer-driven transactions, deposit account fees and wealth management fees increased quarter-over-quarter. Foreign exchange fees decreased quarter-over-quarter due to downward revaluations of FX-denominated balance sheet items partially offset by an increase in customer-driven transactions. Moving on to slide 20. Third quarter noninterest expense was $168 million, a decrease of 11% linked quarter. Excluding amortization of tax credits and other investments and core deposit intangible amortization, adjusted noninterest expense was $154 million in the third quarter, an increase of only 1% quarter-over-quarter and a decrease of 3% year-over-year.

I would also note that excluding the impact of PPP loan origination costs deferred in the second quarter, third quarter compensation expense of $100 million decreased 4% quarter-over-quarter from $104 million in the second quarter. In the second quarter, $7 million of compensation expense associated with PPP loan originations was deferred. The quarter-over-quarter increase in computer software expense reflects amortization of previously capitalized investment spend. Our third quarter adjusted efficiency ratio was 41.3%. Over the past five quarters, our efficiency ratio has ranged from 37.7% to 41.3%. As an organization, we remain committed to controlling expenses across the board in order to support our strong profitability.

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

Dominic Ng -- Chairman, President and Chief Executive Officer

Thank you, Irene. Well, in summary, our net interest margin is stabilizing. Our loan growth is positive. We remain disciplined about efficiency, and credit remains manageable. Business activity for our customers is picking up, and we are looking forward to helping them rebuild and expand into the future. Here, I would like to thank all of our associates for their dedication during these unprecedented times and wish everyone continued good health.

I would now open up the call to questions. Operator?

Questions and Answers:

Operator

[ Operator Instructions] Our first question comes from Ebrahim Poonawala with Bank of America. Please go ahead.

Ebrahim Poonawala -- Bank of America -- Analyst

Good morning. Good morning, Ebrahim. I wanted to if we could just start with credit, Dominic. When we look at the provisioning level, I think assuming that the macro doesn't deteriorate from here just talk to us in terms of your comfort around the portfolio. One, like what do you expect with the rest of the deferrals that are still outstanding as we get toward the end of the year? What percentage of those do you expect to go into nonaccrual versus go back to paying? And what have you learned about the portfolio in the last six months to give us comfort that you're not going to have negative credit surprises in 2021?

Dominic Ng -- Chairman, President and Chief Executive Officer

Well, we've been actually looking at our credit portfolio sector by sector. And in this -- within the C&I, also in commercial real estate and C&I with all the different industry verticals, each vertical get reviewed loan by loan. CRE, we break it down by further hotel, office building, multifamily and then region by region. And obviously, our single-family mortgage has hardly had any problem and has always been for many years. So we've done all of that kind of review. And we, as of today, feel pretty good about where we are today. We think our reserve is definitely adequate. And in terms of our risk rating, classification and so forth, we feel that we are very much current in terms of the classification. From the deferral point of view, as you can see, from June 30 to September 30 and all the way -- even we showed the deferral as of two days ago, it continued to show great progress. And we, at this point, do not see a lot of concern about surprises.

Ebrahim Poonawala -- Bank of America -- Analyst

Got it. And just in terms of capital, I think, Dominic, you mentioned on CET1, even on tangible equity, you have one of the stronger capital levels. You were conservative coming into the cycle, not buying back stock. Just talk to us in terms of how you think about capital allocation, maybe not in the next couple of months, but as we look into the first half of next year and your, I guess, desire to buy back stock if it stays where it is?

Dominic Ng -- Chairman, President and Chief Executive Officer

Well, we have Board meetings every two months or 2.5 months or so. So this is always, like, I would say, a standing agenda. So we update the information, financial condition and balance sheet and then also the mainly economic outlook with the Board members. And then with those information, we are delivering. And then we have discussion of whether we take any kind of action. So at this stage right now, I would say that we are still in that pandemic environment. We are not going to be looking into buying back stock. On the other hand, comes 2021, things can change dramatically in terms of the economic outlook, and then we will do whatever is right accordingly in the base of the circumstances at that point.

Operator

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

Ken Zerbe -- Morgan Stanley -- Analyst

All right. Great. I guess, maybe just looking for a little more detail on the NPA increase. I know you said it was driven by oil and gas. I guess, the concern that we have is does -- does it continue, right? I mean, obviously, you still have a sizable portfolio. It is running off. And then is the -- worries that you -- does it continue to end? Do you have to build reserves for the addition of the portfolio as it deteriorates?

Irene Oh -- Executive Vice President and Chief Financial Officer

Yes. Ken, that's a great question. When we look at the increase in nonaccrual loans and also charge-offs, really over the course of last year and beyond that really, a lot of that has come from the oil and gas portfolio. And we have also increased the reserves, let's say, quarter-over-quarter, 9% to 10%. So when I look at it from the perspective of where the loss content is, I do think it's still in our portfolio in oil and gas. I would say, though, when these loans were previously classified, they are identified and one thing that is positive is that we're not seeing ongoing kind of downward deterioration into classified assets.

Dominic Ng -- Chairman, President and Chief Executive Officer

Yes. I would say, Ken, let me just add, maybe add on to what Irene just shared is that would there be a likelihood of any more potential charge-off losses from the oil and gas portfolio? Definitely. There is that probability. The difference is that we feel very confident because we only have so many loans in the oil and gas portfolio, and it's going, going down. And there are just so many loans in there, and we have looked at every one of them, and we continue to classify them in the right bucket. And the macroeconomic condition as of today is actually more positive than a few months ago. We all recall back in late March and early April, the crude oil prices just dropped to a level. That is unheard of. But it's been pretty much stabilized at that $40 per barrel. And then the gas price actually have gone up quite nicely.

So -- and then keep in mind also that our portfolio, as Irene shared earlier, I mean, substantial percentage of these loans are properly hedged even going into 2021. So it's not like these are the loans that, on a daily basis, they are going one by one, going into triple. I think what we've experienced in terms of the charge off, somewhat relative to peers in that industry and everyone gets -- like from the oil and gas business. So from our perspective is that this is a portfolio that is getting smaller and smaller, and we have substantial reserve provided for it. And we feel confident that we can manage that. And in addition to it, we have plenty of profits and income to offset against these losses and still come up with a decent return of equity and return of asset.

Ken Zerbe -- Morgan Stanley -- Analyst

Yes. And is it a long-term plan just to keep running it off? Because, I guess, it's just hard for us to see how this segment generates positive risk-adjusted returns, given every few years it almost feels like there's a problem and losses spike. I'm actually talking positive risk-adjusted returns over like a multiyear period.

Dominic Ng -- Chairman, President and Chief Executive Officer

We are managing it down. And then we started managing it down last year, and then we continue managing them. But the environment keeps changing. Who knows what's going to happen from the demand around the world or United States or even a technological advancement that changed the dynamic. That, we have no ability to project. I mean, as a bank, we basically facilitate financing with a very, very focused of risk management. If we feel that this is going to be an industry going forward, that we can manage the risk very effectively, there's no reason why we're not into this segment. I think it all gets back down to we will be always very prudent to watch what's going on in the future and do the right thing accordingly.

Operator

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

Jared Shaw -- Wells Fargo -- Analyst

Hi, good morning.

Irene Oh -- Executive Vice President and Chief Financial Officer

Good morning Jared.

Jared Shaw -- Wells Fargo -- Analyst

Looking at the expense side and the efficiency side, do you think given the broader low rate environment, we can get back to a sub-40% efficiency ratio? Or will that really depend on seeing some broader rate improvement? Or is there anything you can do on the expense side to help accelerate that?

Irene Oh -- Executive Vice President and Chief Financial Officer

Yes. Jared, I'll take that call -- question. I think the largest variable for that would be on the revenue side. As we talked about earlier in our prepared remarks, we do feel strongly, fourth quarter and beyond, that revenue, net interest margin, NII will increase. I think we have a long history of proven ability to control the expenses, and that's something that we feel confident in this type of environment that we'll be able to continue to do so while still making the appropriate investments that we need to, to support our growing business.

Jared Shaw -- Wells Fargo -- Analyst

Okay. And then shifting a little bit to the CRE portfolio and the growth you saw this quarter. I guess, how much of that was refining, I guess, somebody else's loan? And what gives you -- how are you getting comfort putting on new CRE product now? And is that translating into better terms and conditions and pricing? Or I guess, maybe your thoughts around what you're seeing and doing on the CRE side?

Dominic Ng -- Chairman, President and Chief Executive Officer

In terms of with CRE loans that we originated, most of -- I mean, almost all of them are with customers that we've been doing business for a long time. And these customers have very strong financial and balance sheet and that we feel comfortable. And then obviously, these are the properties that are less impacted negatively by the pandemic, and that's what we originated. These new loans, some of them are not refi, some of them are just also taking shares from other banks and so forth. The pricing is getting better than -- slightly better than it was, I would say, about six, nine months ago. Obviously, CRE pricing was extremely competitive last year. It's no longer as competitive.

So we will be -- I would say that originating CRE loan with a slightly better pricing going forward. In terms of volume of CRE loans, I would think that in 2021, and we probably may not have as nice of a robust growth of CRE origination like we did in 2019. So you would expect that 2021, the growth rate will be tempered somewhat because of the lack of great quality asset to be financed. But we'll continue to look. And I look at it as East West is not a giant institution. It's not that difficult for us to keep looking and finding gems hiding around the bushes and then just make up enough to show positive growth rate.

Operator

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

Chris McGratty -- KBW -- Analyst

Great, thanks for the question. I want to ask about everyone's favorite topic in taxes. Given the market's expectation that there could be a tax rate increase next year, could you walk us through the potential sensitivity on the tax line and also the amortization line given that you guys have been a little bit more proactive in managing your taxes over the years?

Irene Oh -- Executive Vice President and Chief Financial Officer

Yes. Chris, so when we look at the changes that might happen from a corporate tax rate, 21% to 27%. Of that, at this point in time, although there are a lot of moving parts. We think if that happens, the impact to us will be about 4%. On the rest of it, with the amortization, once we have this call in January to talk about fourth quarter, we can give you a little bit more details on that. Along with that, if that happens, I'll add, at this point in time, we have about $20 million of DTAs that would reverse as well.

Chris McGratty -- KBW -- Analyst

Got it. And then assuming the status quo, just for modeling purposes, I think you said for the fourth quarter, amortization of $20 million, that would bring it to around $75 million for the year. All else equal, is that about -- is that the right math for next year, 15% tax rate and 75% or so on the amortization?

Irene Oh -- Executive Vice President and Chief Financial Officer

No. We'll talk about that in January.

Chris McGratty -- KBW -- Analyst

Got it, thanks.

Operator

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

Dave Rochester -- Compass Point -- Analyst

Hey, good morning guys.

Irene Oh -- Executive Vice President and Chief Financial Officer

Good morning.

Dave Rochester -- Compass Point -- Analyst

On credit, you talked about the reserve release a bit. I was just wondering if you could maybe just give a little bit more detail on your comfort level, reducing that reserve on your CRE book at this point, where there's still uncertainty in the economy and how the remaining deferrals in that book are going to pan out. This quarter, we saw other banks building that reserve in that particular bucket. So I was just wondering what your thoughts were for this quarter. And then if you could talk about how much stimulus that you have baked into your outlook at this point, that would be great.

Irene Oh -- Executive Vice President and Chief Financial Officer

Okay. So if we look at kind of the breakdowns of our allowance, the amount of reserve that we have set aside for our real estate loans is just over $200 million -- so on income-producing real estate and also multifamily. So ultimately, I would say, right now, deferrals, what we're seeing in the portfolio, our customers -- we're very comfortable with that allowance level. Depending on what happens with the forecast, we'll look and see as far as a level appropriate. For our allowance calculation, we rely on Moody's and the economic forecast there to kind of tailor to our portfolio. We do use a multi-scenario approach baseline, S1 and S3, because S3 is a more severe adverse scenario. Overall, I'll share that the reserve -- the quantitative reserve that we set aside is higher than the baseline.

Dave Rochester -- Compass Point -- Analyst

Okay. And then how much stimulus is baked into your overall outlook at this point? What are you guys assuming for government -- additional government stimulus?

Irene Oh -- Executive Vice President and Chief Financial Officer

Yes. So in -- and I think I'll just break it down with a scenario. So baseline did assume 1.5 trillion, the S3 assumed none. So as I mentioned, the overall quantitative reserve that we have is higher than the baseline.

Operator

Our next question comes from Gary Tenner with D.A. Davidson. Please go ahead.

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

Thanks. Good morning. I wanted to questions have been answered, but I was curious on your comments on prepaying the PPP. I think you said $524 million month-to-date in terms of the liquidity facility. How much of that do you expect to exit by year-end?

Irene Oh -- Executive Vice President and Chief Financial Officer

All right. So we paid off the $453 million (sic) $524 million. We'll evaluate and see as far -- excuse me, $423 million (sic) $524 million we'll evaluate and see if we'll pay off more. I think more than the $523 million (sic) $524 million is expected. Depending on how much and the timing of that, we'll look and see as far as the liquidity that we have and then also the pace of the forgiveness of the PPP loans, which has started for us.

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

Okay. And then just in terms of overall balance sheet, you talked about kind of holding some of that liquidity you have in anticipation of loan growth improving. Do you have any -- and also continuing to grow deposits even post pandemic at a good pace. I'm just wondering what your thoughts are for expectations over overall liquidity flows given the amount of excess funding in the system right now.

Irene Oh -- Executive Vice President and Chief Financial Officer

Yes. I mean, I think that's a great question, especially in this quarter. What we've done, especially as the deposit flow has continued, and I think we've gotten a little bit more comfortable reinvesting some of that into securities. And also with our securities book, our AFS securities book, we have extended out the duration a little bit. So I think if you look at the month of September, not quarter-to-date, and the average yield in the portfolio, it is up a little bit, close to 2%. If you look at duration at 6/30, we were about two, six, and we're at about three, eight as of 9/30.

Operator

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

Matthew Clark -- Piper Sandler -- Analyst

Hey, good morning. Maybe first on special -- the increase in special mention. I think you touched on the fact that the commercial real estate migrated a little bit. Can you give us some specific examples of what migrated this quarter?

Irene Oh -- Executive Vice President and Chief Financial Officer

Yes. Matthew, when we look at kind of the migration into a special mention during the quarter, it was really to a certain extent throughout the portfolio. I'll share regardless of whether a customer is on deferral. We're making sure that the grading is appropriate. If necessarily, we are downgrading these loans. So some of the loans we downgraded were loans that were on deferral, but across the board, I would say, in different kind of asset classes, office, multifamily and also retail.

Matthew Clark -- Piper Sandler -- Analyst

Okay. And then just on the deferrals, the C&I ex-energy has been fairly muted to date. Can you give us a sense for why that is and what your customers are saying at this point, whether or not that might increase in the future?

Irene Oh -- Executive Vice President and Chief Financial Officer

It doesn't look like that at this point in time. I think we shared about this last quarter as well. We did initially, as an accommodation for our customers, help them with a one month. We call it a Skip-a-Pay. Certainly, I think that helped us kind of reach out and have those conversations with our customers. On the C&I front, I think the request and kind of conversations that we've had -- the request for deferrals and the conversations we've had with our customers around their cash flows has generally been relatively positive.

Operator

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

David Chiaverini -- Wedbush Securities -- Analyst

Hi, thanks. A couple of questions. The first one on loan growth. You hit on a couple of the categories already about CRE expecting lower growth next year versus this year in single-family residential. You mentioned about similar trend going forward. But on C&I, if we exclude PPP, what type of growth are you expecting in that loan category?

Dominic Ng -- Chairman, President and Chief Executive Officer

Well, for 2021, we do plan to provide guidance at the next earnings release. I mean, at this point, it will be too early for us right in the midst of this upcoming presidential election, with the mystery of when the vaccine will be available. All the sort of things that are happening right now, I just feel that it will be much better for us to have the loan growth guidance to provide to you in January. And -- but in the meantime, all I can share as of today is that in the second quarter, April, May and June, we spent a lot of time focusing on PPP, Skip-a-Payment deferral. We took a lot of time -- number one thing is to focus on keeping our employees in great health. And thank goodness, as of today, we do not have -- one employee actually went to a hospital for COVID-19 and so all of us are in very good health. We were going to continue to stay vigilant to keep everyone in good health so that we can take care of our customers. I mean, that's the number one thing that we're focusing on. And then PPP kept us very busy. And while we're doing PPP, we're also looking into potential deferral and so forth. Some customers just get confused.

They don't really need -- they didn't need a deferral. They just thought they have to get a deferral. So a lot of conversation going on, second. So not until sometimes in the third quarter, when these kind of issues all settle. Our frontline relationship managers and branch managers have start -- I mean, really reaching out and then looking for new business. The good news is that, as we highlighted in our talk earlier, that in the latter part of September, we start really booking some nice C&I loans. And we start seeing growth in C&I. And actually, many of these loans that we originated are brand new customers. I think that to a certain degree, we're fortunate by being active, helping our customers and even noncustomers for PPP or other type of matters. They're banking-related, caused some of these very good prospects to decide to move their banking relationship from the banks to East West. So we're picking up some new business. So that's positive. The first three weeks of October, we also continue to bring in new business from other banks. And that has been very, very helpful for us. And we hope this trend will continue. Now given the fact that we are still in the midst of pandemic, there are not going to be a lot of commercial business that are out there aggressively putting capital investment or growth, other than the one that -- who happen to be in the business that the pandemic helped them.

For those who are in some of the traditional business, the pandemic may not help them. I think their utilization rate for their line of credit would probably continue to stay a little bit lower. So we don't expect that many of the existing customers is going to have a strong push to draw down the line dramatically higher to cause a substantial growth there, but we are getting new customers that supplement the growth. So all in all, I think at this point, we feel that fourth quarter looking more positive from the C&I side. And by the way, it's not just coming from one particular industry or one particular geographic region, it's pretty much across the board for East West Bank. Several industry verticals, even our entertainment business, are growing nicely back. Our digital media business are coming back strong. And so our clean energy, the project finance, those type of business are all coming back stronger than before. So we hope this trend will continue in 2021. But for the detail of providing some sort of a forecast for growth on the lending side, concluded to the fourth quarter 2021 -- and January 2021.

David Chiaverini -- Wedbush Securities -- Analyst

Yes. That's helpful. And then shifting gears to fee income. You mentioned about how customer transaction activity increased in the third quarter. Curious as to what the outlook is for the fourth quarter of that customer transaction activity. That momentum continued into the fourth quarter, and we should expect either stabilization or rebound. Just curious as to your thoughts there.

Dominic Ng -- Chairman, President and Chief Executive Officer

Yes. As you can see in the fee income side, for customer-related banking, transaction type of fee income have all picked up. So if you look at, for example, like deposit account fees, that has a lot to do with this new banking relationship that I talked about earlier and some of the existing customers expanding the relationship with us. That combination of two result in us generating even stronger cash management fee income. Keep in mind, though, we talked about, for the last few years, about investing in the internal infrastructure and product enhancement, technology improvement. All of those costs that we put in are generating tangible results. Our -- we built our cash management system that can not only just accommodate but actually offer great services to many of the more sophisticated larger-sized business who now can just comfortably move the banking relationship from large banks to East West Bank because we have the capability to handle their cash management needs.

So that result in more fee income for us and larger DDA account deposits. And we see that trend as very positive, that we are able to do all of that while a lot of us are still working at home under the pandemic. So what we're looking forward to is to continue to keep pushing and both working with existing customer, expanding and deepening the banking relationship and also getting new customers from the outside. So I look at from the cash management, wealth management, and even trade finance, we have a 9% pickup in terms of business. So all in all, I look at it as we just going to continue to focusing on making sure that we take good care of our clients. And then hopefully, we'll get more new business through this referral from our great clients and so forth and then one step at a time and then getting more meaningful core fee income coming to the bank in 2021.

Operator

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

Brock Vandervliet -- UBS -- Analyst

Thanks. Hey, Dominic you've talked a lot in the past about the political environment or at least a bit in the past about it. It's obviously been pretty fraught between the U.S. and China. As we look at potentially a Biden win, how do you think this could potentially change your business?

Dominic Ng -- Chairman, President and Chief Executive Officer

We are always sort of like an organization that's very nimble in terms of adjusting comfortably with whatever the political environment that is out there. If you recall, four years ago, the U.S. government policy has been very, very much -- wanted to bring in investments from China and also investing in China and so forth. And for the last couple of years, due to presidential election and then the political rhetorics have turned hostile, and that have changed the dynamic dramatically. And we looked at -- even with the trade war in place for the last few years with the tariff, as you have seen so far, we have such a big trade finance portfolio, import/export business and then also with Greater China exposure. But at the end of the day, we hardly have any losses. Now the business slowed down a bit because we're being more cautious temporarily. And then also, of course, because of the pandemic, actually, China has shut down for a few months.

And so that had affect the growth aspect. But in terms of from a risk aspect, we manage very, very well and have almost no losses. So with that in mind, I would say that looking forward, Joe Biden had made it very, very clear about his foreign policy, which is to get back instead of American coloan and against the world and American is going to work with allies and it's going to take leadership back into United Nation, WHO, WTO, etc, and U.S. is going to get back into the front seat. And I am 100% sure when U.S. wanted to get back in the front seat and engagement with the allies, and China will be more than delighted to step back, to stick on second, on third or fourth seat and to collaborate with United States for climate change and all the other activities that all the nations around the world need to work together. So I would expect that if that happened, there's no question whether it's a Republican Party or Democratic. At the end of the day, U.S. will compete with China economically. And I think it's the right thing to do, to compete. There's nothing wrong to compete.

But on the other hand, I think that I have also strong confidence that there's going to be a lot more business exchange between U.S. and China. Just reflect back for the last few months. Now while it doesn't get a whole lot of news coverage, but JPMorgan, Citibank, Morgan Stanley all increased their stake in the joint venture in China are taking majority ownership. BlackRock, Neuberger Berman and a few others and the fund management business are getting new licenses. Insurance company getting new license. Everyday, American Express getting new license. Costco opening more stores. Starbucks opening more stores. In fact, U.S. business never stopped, never stopped expanding into China. And the Chinese government also have never stopped bringing them in and giving them even more business opportunities than had ever been given before. In fact, just last week, a senior minister in China are talking about additional intellectual protection right for foreign direct investments in China. So on a day-to-day basis, for people like us, they're constantly watching what's happening between U.S. and China and actually do look at regulation instead of just mainstream media news.

We are seeing China are making aggressive effort to continue to open up the market, letting foreign investors to take on the majority ownership or full ownership in multiple different industries, granting license that they never granted before and then changing the law in terms of intellectual property protection and also penalizing company that force transfer of technology and so forth. All of those things that we've been hearing many, many times from the U.S. Trade Representative Lighthizer, all of those things that we've been hearing, they are making the changes to it. Now they're not broadcasting all over the world, but they are making the changes. And this business whether from U.S. or from Europe are directly benefiting from it.

So in this worse position is that, well, most of those are irrelevant to us to a certain degree because we're not going there to get some big invest -- capital investments and then get certain license for certain type of new business. Our position is that the cross-border business is still strong, and China have emerged from the pandemic, back to business as usual. Many of my colleagues in Shanghai and Shenzhen, they go out to movie theaters, having dinner with their friends, don't even have to wear mask. So I'm happy for them. So they are doing business. And we absolutely are there doing business also. You look at Hong Kong. Hong Kong, the stock exchange is going to overpass U.S. in terms of IPO listing because companies are all going there, lining up unicorn after unicorn, lining up in Hong Kong or in Shanghai Stock Exchange, Shenzhen Stock Exchange. Through these IPOs, there can be a lot more new millionaires to billionaires, and they all need to make investments.

They all need to have their personal wealth management, and they're buying properties around the world. U.S., still one of the preferred places for either investments or other investments. So we do feel comfortable that business is going to be there. So we have no ability to predict what the outcome is for the election coming on November 3. But one way or the other, one thing I can guarantee everyone, East West know how to adjust and adapt and find way to thrive under whatever circumstances.

Brock Vandervliet -- UBS -- Analyst

Thanks, Dominic. Looking forward to a better better backdrop there thank you.

Dominic Ng -- Chairman, President and Chief Executive Officer

Thank you.

Operator

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

Dominic Ng -- Chairman, President and Chief Executive Officer

Thank you, again, and thank you for joining our call. And we are looking forward to speaking with all of you in January. Bye-bye.

Operator

[Operator Closing Remarks]

Duration: 70 minutes

Call participants:

Julianna Balicka -- Director of Strategy and Corporate Development

Dominic Ng -- Chairman, President and Chief Executive Officer

Irene Oh -- Executive Vice President and Chief Financial Officer

Ebrahim Poonawala -- Bank of America -- Analyst

Ken Zerbe -- Morgan Stanley -- Analyst

Jared Shaw -- Wells Fargo -- Analyst

Chris McGratty -- KBW -- Analyst

Dave Rochester -- Compass Point -- Analyst

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

Matthew Clark -- Piper Sandler -- Analyst

David Chiaverini -- Wedbush Securities -- Analyst

Brock Vandervliet -- UBS -- Analyst

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