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East West Bancorp Inc (NASDAQ:EWBC)
Q4 2020 Earnings Call
Jan 28, 2021, 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's Fourth Quarter and Full-Year 2020 Financial Results Conference 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. 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 full-year and fourth quarter of 2020. With me on this conference call today are Dominic Ng, our Chairman and Chief Executive Officer and Irene Oh, our Chief Financial Officer.

We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For a more detailed description of risk factors that could affect the company's operating results, please refer to our filings with the Securities and Exchange Commission, including our Annual Report on the Form 10-K for the year ended December 31st, 2019.

In addition, some of the numbers referenced on this call pertain to adjusted numbers. Please refer to our full-year and fourth quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures. During the course of this call, we will be referencing a slide deck that is available as part of the webcast and on the Investor Relations site. As a reminder, today's call is being recorded and will also be available on 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, and thank you everyone for joining us for our full-year and fourth quarter 2020 earnings call. I will begin the review of our financial results with Slide 3 of our presentation. This morning we reported full-year 2020 net income of $568 million or $3.97 per share. We returned 1.16% on assets and 11.2% on equity for the year. Thanks to the unflagging commitment of our associates, we are successfully navigating the COVID-19 pandemic and the resulting economic crisis and also the low interest rate environment.

The fourth quarter was a strong end to the year and resulted in net income of $164 million or $1.15 per share, increased by 3% quarter-over-quarter. Fourth quarter return on asset was 1.24% and return on equity was 12.45%. In Q4, we earned $251 million of pre-tax pre-provision income on total revenue of $416 million. Quarter-over-quarter, our revenue grew by 10%, reflecting loan growth and higher fee income. Our pre-tax pre-provision income grew by 12% and our pre-tax pre-provision profitability ratio expanded by 12 basis points to 1.9% in the fourth quarter, up from 1.78% in the third quarter.

Importantly, we saw across the board improvement in our asset quality metrics such as: declining deferral and delinquency rates, lower net charge-offs, and decreasing non-performing and criticized assets. The macroeconomic outlook for post-pandemic recovery has been steadily improving and as we begin 2021, we are optimistic about the year ahead.

And now moving to Slide 4 for summary review of our balance sheet. As of December 31st, 2020, total loans reached a record high of $38.4 billion growing by 10% annualized from September 30, and by 10% year-over-year from December 31st, 2019. Paycheck Protection Program, PPP loans totaled $1.6 billion as of December 31st, 2020, a decrease of $204 million from September 30, due to forgiveness of loans by the SBA. We are participating in the current round of PPP to support our customers and communities and as of yesterday we funded over 2,600 new PPP loans totaling over $380 million. Excluding PPP, total loans grew by $1.16 billion in the fourth quarter. This reflects growth in all of our major loan portfolios. Fourth quarter loan production was broad-based and came from across our various lending teams and branch network, diversified by loan product, industry, geography, and property type. We think that this lays a strong foundation for the coming years.

Deposit growth was exceptionally strong in 2020. As of December 31st, total deposits reached a record high of $44.9 billion, growing by 30% annualized from September 30 and by 20% year-over-year. In particular, non-interest bearing deposit reached a record $16.3 billion as of December 31st, 2020. Throughout 2020, growth in non-interest-bearing deposit balances outpaced total deposit growth. Non-interest bearing demand deposits made up 36% of total deposit as of December 31st, 2020, up from 30% a year ago.

Similar to loan growth, deposit growth was well diversified across our commercial teams and branch network, including cross-border clients, reflecting the addition of new customers and expanding wallet share of existing relationships. We look forward to the strong momentum in core deposit growth carrying into the coming year.

Turning to Slide 5, you can see that we ended the year with common equity tier 1 ratio of 12.7% and a total capital ratio of 14.3%, providing us with meaningful capacity for growth to support our customers. Our book value and tangible equity per share were both up 3% from the prior quarter and our tangible equity to tangible asset ratios remain at 9.3% as of December 31st, 2020, compared with September 30. Year-to-date, we increased tangible equity per share by 9%.

Given our strong capital ratios and positive earnings growth and trajectory, I'm pleased to announce that East West Board of Directors approved a 20% increase to the quarterly common stock dividend from $0.275 per share to $0.33 per share, equivalent to an annual dividend of a $1.32. The new dividend will take effect beginning in the first quarter and is payable on February 23rd, 2021 to stockholders of record on February 9, 2021.

Moving on to a discussion of our loan portfolio beginning with Slide 6. C&I loans outstanding excluding PPP were $12.1 billion as of December 31st and total C&I commitments were $17.1 billion. Quarter-over-quarter C&I loans outstanding ex PPP grew by 18% annualized. Fourth quarter C&I growth built on the positive momentum in pipelines and commitments that began in the third quarter. In 2021, we expect C&I growth to be stronger in this second half of the year compared with the first half as the anticipated post pandemic economic recovery takes hold.

Fourth quarter C&I growth was well diversified by industry with notable commitments growth in General Manufacturing & Wholesale, Private Equity, Entertainment, Food-related industries and Clean Energy. Further diversifying our C&I growth was growth from our Greater China portfolio, which was $1.5 billion as of December 31st. In the fourth quarter, loans in the Greater China grew by $160 million accelerating from growth of $82 million in the third quarter. The utilization rate of loans outstanding to total commitments was 70.5% as of December 31st, 2020, essentially unchanged from September 30.

Moving to Slide 7 and 8, which shows essential details of our commercial real estate portfolio. Total commercial real estate loans were $14.8 billion as of December 31st, 2020. Quarter-over-quarter, this portfolio grew by 4% annualized from September 30. Presently, this is a slow-growing portfolio, reflecting our conservative underwriting in the current environment and a lower level of transactions in the market, both for new deals and for refinancing. We expect to see relatively slower growth from commercial real estate in 2021 until the anticipated post pandemic economic recovery gains momentum.

On Slides 9 and 10, we provide details regarding our single-family residential loans and home equity lines. During the fourth quarter, we originated $1.1 billion of residential mortgage loans, an increase of 38% compared with $768 million in the third quarter. This was a record quarter of residential mortgage origination for East West and we are seeing the momentum continue in January.

As of December 31st, single-family residential loans were $8.2 billion, up by 20% annualized from September 30. Home equity lines outstanding were $1.6 billion as of December 31st, up by 23% annualized from September 30, including unfunded commitments. [Technical Issues] our commitment on home equity lines were $3.4 billion as of December 31st and the utilization rate was unchanged quarter-over-quarter at 48%.

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

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

Thank you, Dominic. I'll start by discussing loans on COVID-related deferrals on Slide 11. As of December 31st, 2020 loans on full payment deferral were 1.2% of total loans, down from 2.7% as of September 30th, including loans on partial payment deferral, which generally are modifications of P&I payment to interest-only. Deferred loans totaled 2.6 million [Phonetic] of total loans, down from 4.2% as of September 30th.

Quarter-over-quarter loans on COVID-related deferrals decreased by 36% between September 30th and December 31st. The largest improvement was in our commercial real estate loan deferrals, which decreased by $451 million or 39% since September 30th. As of December 31st, the deferral rate on CRE was down to under 5%. Deferrals on residential mortgages decreased by 35% in fourth quarter and the deferral rate on residential mortgages was 2.5%. The deferral rate on C&I loans continue to be very low.

Turning to Slide 12, for a review of our asset quality metrics and Slide 13 for a review of our allowance for loan losses. Along with the decline in COVID-19-related deferrals, I'm very pleased with the across-the-board improvement in our asset quality metrics this quarter. Quarter-over-quarter, our criticized and non-performing assets declined and related asset quality ratios improved. The outlook for an economic recovery continues to strengthen, our borrowers have proven to be resilient and adaptable. We feel comfortable with the credit risk in our portfolio and believe that credit costs for 2021 will be manageable.

Non-performing assets were 45 basis points of total assets as of December 31st in the amount of $235 million, a quarter-over-quarter decrease of 10%. Accruing loans 30 to 89 days past due were $51 million or 13 basis points of total loans as of December 31st, a quarter-over-quarter decrease of 40%.

Criticized loans were $1.2 billion as of December 31 or 3.2% of total loans, a quarter-over-quarter decrease of 18% from $1.5 billion as of September 30th or 3.9% of total loans. Within that, both classified and special mention loans declined quarter-over-quarter and their respective ratios improved. As of December 31st, 2020 classified loans decreased to 1.7% of total loans and special mention loans decreased to 1.5% of total loans.

Criticized C&I loans were diversified by industry and the criticized commercial real estate loans were likewise diversified by property type. The largest concentration within criticized loans by either industry or property type remained oil and gas. Quarter-over-quarter, criticized CRE loans decreased by 19% and criticized C&I loans excluding oil and gas decreased by 18%. Criticized oil and gas loans were $324 million as of December 31st, a quarter-over-quarter decrease of 74% or 19% -- $74 million, excuse me or 19%. Reduction in these loans came from exits, pay downs, and upgrades. Oil and gas loan charge-offs were under $1 million in the fourth quarter. The backdrop for the oil and gas borrowers have strengthened with higher commodity pricing and demand.

On Slide 13, we review the components of our allowance for loan losses. Our allowance for loan losses totaled $620 million as of December 31st or 1.68% of loans held for investment, excluding PPP loans, compared with $618 million or 1.73% as of September 30th and compared with $483 million or 1.39% on day one post CECL. Year-to-date 2020 post day one of CECL, we added $137 million to the allowance, largely due to the deterioration in the economic forecast due to COVID. However, the economic forecasts have improved in the second half of 2020, resulting in modest declines in the required allowance coverage for all of our major loan portfolio classifications. If the macro economic conditions continue to improve and credit quality holds or improves, we expect to see continued reduction in the required allowance ratio.

During the fourth quarter, we reported $24 million provision for loan losses compared to $10 million in the third quarter. The quarter-over-quarter increase in the provision was primarily due to fourth quarter loan growth of over $1 billion, excluding PPP loans. The other allowance drivers including the improved macroeconomic forecast, lower deferral rates on commercial real estate and reductions in adversely graded delinquent and non-performing assets, lower oil and gas exposure, and certain charge-offs largely offset each other.

Net charge-offs in the fourth quarter were $19 million, a decrease of 22% from $24 million in the third quarter. The fourth quarter net charge-off ratio was 20 basis points of average loans annualized, an improvement of 6 basis points from the third quarter. A quarter-over-quarter-over-quarter increase in commercial real estate charge-offs in the fourth quarter was more than offset by the quarter-over-quarter decrease in C&I charge-offs. Fourth quarter charge-offs from oil and gas loans totaled under $1 million.

And now moving to a discussion of our income statement on Slide 14. In this slide, we summarize the key line items of the income statement, which I'll discuss in more detail on the following slides. Fourth quarter 2020 included some non-GAAP adjustments related to the 2019 write-off of DC Solar tax credit investments, which added $3 million or $0.02 per share to earnings. Fourth quarter amortization of tax credit and other investments included $11 million of recoveries related to DC Solar and fourth quarter income taxes elevated by $8 million of tax expense related to DC Solar. Largely as a result of DC Solar-related items, the effective tax rate for the fourth quarter was 23%, compared with 19% in the third quarter of 2020. The effective tax rate for the full-year of 2020 was 17% compared to 20% for 2019.

I'll now review the key drivers of our net interest income and net interest margin on Slide 15 through 18 starting with average balance sheet growth. Fourth quarter average loan growth of -- fourth quarter average loans of $37.7 billion grew by $565 million or 6% linked quarter annualized, led by growth in residential mortgage followed by C&I loans, excluding PPP and commercial real estate. Fourth quarter average deposits of $44.4 billion, grew by $3.2 billion or 31% linked quarter annualized, driven by very strong growth in non-interest-bearing demand deposits, which grew at a rate equivalent to 56% annualized. All other deposit categories, excluding CDs also grew.

With the strong deposit growth, we ended the year with an average loan-to-deposit ratio of 85%. Average available for sale debt securities increased by almost $1 billion from the third quarter, as we deployed some of our cash. Late in the quarter, we also added $250 million to repo assets, which did not yet show up in average balances. We continue to deploy excess liquidity into AFS securities, but given the low interest rates and the flat yield curve, attractive opportunities are limited. In October of 2020, we utilized our excess liquidity to payoff in full, the PPPLF, which was $1.4 billion as of September 30th, 2020. In the second quarter of 2021, we have $400 million of FHLB advances maturing at a rate of 2.25%.

On Slide 16, you can see that fourth quarter 2020 net interest income of $347 million increased by $27 million or 7% linked quarter and a net interest margin of 2.77% expanded by 5 basis points from the prior quarter. Excluding the impact of PPP loans and the PPPLF, fourth quarter adjusted net interest income of $333 million increased by 5% or $5 million quarter-over-quarter and fourth quarter adjusted NIM of 2.76%, compressed by 1 basis point from the third quarter. PPP loans interest and deferred fee income was $14 million in the fourth quarter, up from $8 million in the third quarter. In the third quarter, we adjusted the deferred fee income to account for the slower than anticipated forgiveness and payoff of these loans.

As of December 31st, we have $13 million of deferred fees on last year's PPP loans left to accrete in 2021 plus of course the interest income of 1% on the PPP loans outstanding. Dominic shared the month-to-date funding of new PPP loans earlier on the call. Based on that and applications in process, we expect to fund approximately $650 million of new PPP loans in 2021, generating approximately $28 million of gross PPP fee income, plus interest. A 5 basis point quarter-over-quarter increase in the fourth quarter GAAP NIM breaks down as follows: up 6 basis points from a lower cost of deposits; up 5 basis points for more PPP income; up 1 basis point from the payment of the PPPLF, partially offset by down 6 basis points from excess liquidity in the form of more lower yielding assets and also down 1 basis point from lower load and other earning asset yields.

Turning to Slide 17, fourth quarter average loan yield of 3.68% expanded by 8 basis points from last quarter. Excluding the impact of PPP, the fourth quarter adjusted loan yield of 3.69% contracted by 1 basis point quarter-over-quarter, exhibiting relative stability. The downward pricing of our variable rate loan portfolio is behind us. In the upper right quadrant, we laid out our average loan yields by portfolio. As you can see our single-family residential mortgage product is the least rate sensitive portfolio and continues to carry attractive yields.

Turning to Slide 18, our cost of deposits continue to decline in the fourth quarter as maturing higher rate CDs repriced to current market rates. We expect to continue to reduce our cost of deposits as time deposits maturing in the first quarter of 2020 reprice lower. Our average cost of deposits for the fourth quarter dropped to 25 basis points, down from 33 basis points in the third quarter, an improvement of 8 basis points. The spot rate of total deposits as of December 31st was 22 basis points. Month-to-date in January, the spot rate is down another 2 basis points to 20 basis points. Our fourth quarter average cost of interest bearing deposits dropped to 40 basis points, down from 50 basis points in the third quarter, an improvement of 10 basis points.

The spot rate of interest-bearing deposits as of December 31st was 35 basis points. Month-to-date in January, the spot rate is down another 3 basis points to 32 basis points. The average cost of CDs in the fourth quarter was 74 basis points. We have $1.3 billion of CDs maturing in the first quarter at a blended rate of 1.22%. The rate paid on originations or renewals of domestic CDs in the fourth quarter of 2020 was 25 basis points compared to 43 basis points in the third quarter. Month-to-date in January, this rate kicked down to 22 basis points.

Moving on to fee income on Slide 19, total non-interest income in the fourth quarter was $70 million compared with $54.5 million in the third quarter. The quarter-over-quarter increase was driven by a number of factors including a favorable change in the credit valuation adjustment of interest rate contracts, an increase in customer driven foreign exchange transactions, and an increase in net gains on sale of SBA loans. Further treasury management fees continued to grow nicely as we grow commercial deposit accounts and transactions.

Moving on to Slide 20, fourth quarter non-interest expense was $179 million, an increase of 4% linked quarter. Excluding amortization of tax credits and other investments and core deposit intangible amortization, adjusted non-interest expense was $166 million in the fourth quarter, an increase of 7% quarter-over-quarter and essentially flat year-over-year. The quarter-over-quarter change in operating expenses was primarily driven by increased bonus compensation accrual and increased OREO expense, which was included in other operating expense.

The fourth quarter adjusted efficiency ratio was 39.8%, an improvement from 40.8% in the third quarter. Over the past five quarters, our efficiency ratio has ranged from 38.3% to 40.8%, despite operating headwinds from the COVID pandemic-related economic slowdown and near-zero interest rates.

And with that, I'll now review our outlook for 2021 on Slide 21. For the full-year 2021, we currently expect year-over-year loan growth excluding PPP of 6% to 8%. For context, loan growth excluding PPP was 6% in 2020 and 7.5% annualized for the second half of 2020. We expect well-diversified growth in 2021 coming from all of our major loan portfolios. The diversification of our loan portfolio in terms of loan type, industry, real estate property, and geography allows us to outperform our peers in terms of loan growth year-in, year-out.

Year-over-year adjusted net interest income growth, excluding PPP generally in line with loan growth on a full-year basis. Underpinning our interest rate, interest income assumptions is the current forward interest rate curve. Adjusted non-interest expense growth excluding tax credit investment amortization of 3% to 5% year-over-year. In the current environment, we are focused on net interest income and pre-tax pre-provision income growth.

Provision for credit losses to range between $70 million and $80 million. With the loan growth that we expect much further improvement in the economic forecast, this provision outlook anticipates that the allowance coverage of loans will continue to modestly reduce from current levels. Full-year 2021 effective tax rate of approximately 15%, including the impact of tax credit investments. There will be quarterly variability in the tax rate due to timing of tax credit investments placed into service.

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

Dominic Ng -- Chairman, President and Chief Executive Officer

Thank you, Irene. In summary, we had a strong finish to a most unprecedented year. It has been a challenging year for many and I wish to thank all of our associates for their commitment and dedication to meeting our customers' banking needs. As I said at the beginning of my remarks, we are optimistic about the year ahead including the expected additional government stimulus to rebuild businesses and communities, enhanced support for public health, and the broader distribution of COVID-19 vaccines.

In addition, we're looking forward to an improvement in the discourse between the US and China, which will be constructive for cross-border capital flows and accordingly for our clients' business opportunities. We have strong capital and liquidity to support balance sheet growth as the economy recovers and we are confident that we will be able to deliver another year of strong financial performance for our shareholders in 2021.

I would now open up 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 comes from Ebrahim Poonawala with Bank of America. Please go ahead.

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

Hey, good morning.

Dominic Ng -- Chairman, President and Chief Executive Officer

Good morning.

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

Good morning.

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

I guess just first question on credit if -- there are two things you can address, I guess, Irene, one talk to us about the remaining deferrals both the partial and the full deferrals. When is the sunset for these? When do they come to an end? And separately, if you could address your outlook on net charge-offs, as I think about what you talked about reserve release -- potential for sort of reserve release and relatively to your provisioning guidance. So if you could address those two?

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

Sure. On the deferrals, I think, we talked about before, earlier in 2020 most of the deferrals P&I or just the principal were for three months period. I would say that the ones that we had that were outstanding at year-end. Some of them giving just the nature and the process of deferrals every three months or a little bit longer term, but on average I would say still two to six months is what those deferral terms are.

On the charge-off ratios and our expectations for 2021, I wanted to just start by saying, if you look at the full-year or the fourth quarter for 2020, the charge-off ratios were very low annualized for the fourth quarter 20 basis points, full-year of 17% [Phonetic]. So at this point in time, I think it's realistic that they -- it may increase a little bit from these levels, but as we look at credit quality, as it stands today, there is nothing that we're really concerned that the charge-off ratios will increase dramatically.

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

Got it. And just on a separate note, maybe, Dominic. When you think about the C&I loan growth for the year, do you see there's more potential for upside surprise or downside risk to your outlook? And just talk to us about any new opportunities that you see on the C&I lending front that could be a meaningful growth driver for the bank? Thank you.

Dominic Ng -- Chairman, President and Chief Executive Officer

Well, we are always working on an upside surprise. But that being said, I think that we pretty much look at this year. Now the fourth quarter is exceptional 18% annualized growth is really accumulation of efforts from the third and the fourth quarter, and we, kind of, like somewhat highlight in the third quarter that we were developing as much stronger pipeline, you know, so though those loans can again booked in the fourth quarter, so that was exceptional. But if we look at the second half of 2020, sort of, like annualized growth was about 7% for C&I.

So we are, kind of, using that as our current run rate, and we feel pretty good about where we are today, because we were able to grow in a very diversified direction from industry types, product mix and geographic region, including even the Greater China region as I mentioned earlier in my remarks that our Greater China -- obviously the Chinese economy is -- recovered ahead of United States and so we saw positive C&I loan growth in Hong Kong and China in the third quarter 6.5% annualized growth for C&I loan growth in Greater China in third quarter and then accelerate in the fourth quarter to 12% annualized growth. So we see that all has -- so good signs, and then if we looked at so far domestically, you know, from private equity, general wholesale, manufacturing, entertainment, clean energy, all of these different areas we're growing. So from that standpoint I -- overall right now, we expect them to continue to do well, and so hopefully we'll do better than what we forecast.

But in terms of downside, I guess, the downside will be in case, I don't know, if there is a -- the vaccine distribution is not working well and then somehow the execution from the government and toward the stimulus plan was not working and so forth. And then that can potentially sort of like derail some of the customers' confidence to invest or to grow the business, that can potentially happen. But I looked at the current administration, it looks like we have all very seasoned veterans that are managing the best they can. I have -- I think a higher confidence at this point that there is higher likelihood that they will be able to get the economy turn around in the second half of the year.

Operator

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

Ken Zerbe -- Morgan Stanley -- Analyst

Great, thanks. My first question, just in terms of your NII guidance that is going to generally be in line with loan growth. Your loan growth comments that you said, obviously -- that loan growth picks up in the back half of the year. Should we expect the NII to follow that same trend like that, it stays relatively flat in the first half and then accelerate in the back half for an average of, just call it 6% to 8% or would love any commentary? Thanks.

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

Ken, so our guidance is end of period loan growth of 6% to 8%. So with the NII, obviously following that average loan growth for the year. I think in general, probably when you look at that might be on the lower end of that 6% to 8% and probably what makes sense from that calculation.

Ken Zerbe -- Morgan Stanley -- Analyst

Got it, understood, OK. Yes, I was thinking actually end of period. That totally makes sense. And then just a separate question, in terms of your CECL day one reserve, I think it was about 135 basis points, but it could be wrong? Is that still a good target post pandemic of where you might want to be, given your current loan mix?

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

Yes, certainly as you know, it's very complex calculation, so I can't comment on necessarily where I think it's going to end up. But I would confidently say as economy recovers, as a credit quality continues to improve there I believe there's certainly room to lower that allowance from the levels we are today.

Ken Zerbe -- Morgan Stanley -- Analyst

Alright, thank you.

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

Thanks, Ken.

Operator

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

Michael Young -- Truist Securities -- Analyst

Hey, thanks for taking the question and pre-emptive congratulations on the year of the ox, I hope it's better than the year of the rat. Wanted to ask just did early on the charge-off this quarter and maybe what you see coming through the pipe, I know generally you guys when there is very low loan to value on commercial real estate. So kind of just curious what's causing the actual charge-offs in these buckets?

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

Yes, so the tariffs for CRE in the quarter, we -- obviously, especially with the pandemic in the environment. There are some loans that we're working through, so these have been, kind of, problem non-performing loans for a while and depending on, kind of, looking at where the cash flows are and valuations and a year-end, kind of, making sure that the books are in order, took the charge-offs.

Michael Young -- Truist Securities -- Analyst

Okay. So they are burning through, kind of, 30% to 50% equity cushions at resolution?

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

Yes. Well, yes, I think for these specific loans that are problematic, certainly the circumstances are unique, which is why as -- which is what you're referring to right? Generally for our borrowers and the loan to value has being so low, there's is a lot of equity. But there are specific situations related to really cash flow, which is why we took the charge-offs.

Dominic Ng -- Chairman, President and Chief Executive Officer

I do want to add that overall from a commercial real estate portfolio multi-family, office building, hotels, retail shopping centers and then all industrial buildings, you name it. All of that, I mean, as of today, we have a pretty strong portfolio based on not only just LTV, but many of our customers despite the pandemic are still getting by quite well. So, in fact, that's why you see the classified and criticized assets ratio coming down and deferral coming down. And surprisingly, we always expect that these customers should do well -- should do better as an average, compared with industry as a whole, because of the low loan-to-value and then also many of them have personal guarantee, and they have a lot of liquidity. But I think the pandemic was a very good stress test to see how overall most of these customers have done well. And then obviously, we always have a few isolated incident here and there and that's what happened.

Michael Young -- Truist Securities -- Analyst

Okay. And maybe just as a follow-up on the residential lending, which seems like it might be a larger portion of the growth this year. What rate of provision do you put on that? And should we expect them, kind of, a lower growth rate of fee income as a result of that higher mix of resi loan?

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

Yes, for East West and the residential lending portfolio that we have in this product some variation of it that we've been originating for 40-years. The credit quality generally has been outstanding. In general, the reserve that we have for our single-family and also the HELOC, which I might add are largely firstly HELOC is quite more relative, so the allowance that we bought for the rest of the portfolio. And in fact with the improvements in the forecast during the fourth quarter, we've reduced the -- kind of required reserve from about 30 basis points, down to 20 basis points. Overall as I mentioned with the data that we have of the historic losses over the course of 10-years, 20-years, it's been incredibly low for this portfolio.

Michael Young -- Truist Securities -- Analyst

Okay, thank you. Happy New Year.

Dominic Ng -- Chairman, President and Chief Executive Officer

Happy New Year. Thank you.

Operator

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

Dave Rochester -- Compass Point -- Analyst

Hey, good morning guys.

Dominic Ng -- Chairman, President and Chief Executive Officer

Good morning.

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

Good morning.

Dave Rochester -- Compass Point -- Analyst

On your NII guide, I was just wondering what your thoughts were on adjusted NIM that you're expecting in that? And given the strong securities growth in the quarter, if I could just hear your assumptions for that growth and deposit growth, which all will ultimately impact earning asset growth and NII as well?

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

Dave, I think your question is really maybe the most unknown thing for US banks right now, as far as the liquidity and the deposit growth that most banks are continuing to experience. I think for us when we look at the growth of NIM, NII, we're very comfortable that we'll be able to expand from the fourth quarter levels, not year-over-year but certainly from the fourth quarter levels, and that will be able to maybe just kind of continue to expand throughout 2021.

I'll also add, maybe one of the key drivers of why we're comfortable although on the asset side, there is some challenges largely asset side, things have repriced down, securities I'll share, like for example, the securities that we're buying in January probably yielding about 1.7% or so. We have extended all the duration a little bit, but not extensively. And then what we have there, we're more comfortable is we do have a lot of deposits yet. And the funding that we expect to reprice over the course of the coming months.

Dave Rochester -- Compass Point -- Analyst

Okay, great. And just one follow-up on capital, you got a plenty of excess capital and the buyback is still outstanding. You haven't done anything with it since early last year. I was just wondering what you guys are waiting for at this point it looks like you've had some good improvement on the credit side. Regulators seem to be warming to it a little bit with the DFAST banks announcing buybacks for this quarter? So just wanted to get your updated thoughts there.

Dominic Ng -- Chairman, President and Chief Executive Officer

Yes, you're right, we still currently have a buyback authorization outstanding of $354 million remains. At this point, you know, we are not -- we do not anticipate doing any buyback in the near future, because frankly we look at where we are right now. We are excited about the growth opportunities ahead of us. And frankly we prefer to have capital available to take advantage of any emerging opportunities that may come. And as of today when we look at where we are from a return perspective, you know, currently we are generating attractive return of equity. And we actually think we can hopefully do even better going forward.

So then that point of view, is not something that we lack of return that we need buyback to push earnings per shares and stuff like that. Our position is that from my experience for many years at East West Bank, we always done best whenever there is any kind of economic inflection point. And so one of the reasons why we have done that is not just ability to execute and all the other, you know, what our associates, who have done the great job. But more importantly, we have a lot of capital always at that time. And allow us to be in position to take advantage or turn crisis into opportunities and so forth. So I generally inclined to stay with a little bit more capital and -- but we will continue to watch the -- our ability to generate above average return of equity for our shareholders, as long as we feel that we can do that and then we will continue to stay in this position for now, until a great opportunity to come along that we may deploy the capital differently.

Our Board of Directors all very engaged, so the beauty of where we are right now, if I looked at from a capital perspective we're really looking at the situation that we can just make a Zoom call with our Board members anytime, and have a discussion, execute a buyback. So it's not like there are any kind of regulatory constrain or any of the other issues is very different than when we're building up a separate C&I platform or when we start building something monumental. So this is something that is very easy to do and we are always shareholders friendly and we know exactly when is the right time to announce a buyback, which we did back in early last year. So I mean that's the part that we philosophically we are in line with our shareholders and we will do the right thing. It's just a matter of like level of confidence that we have right now for potential future opportunities and then that's why we said at this point.

Operator

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

Chris McGratty -- KBW -- Analyst

Great. Good morning.

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

Good morning.

Chris McGratty -- KBW -- Analyst

Hey, Dominic, I just wanted to follow-up on that prior question, is there a shift in maybe willingness to do a deal, if you're not going to buy the stock? I mean, I understand the confidence in the growth outlook, but I'm wondering, if a deal might be more on the table in '21 than it was in prior years?

Dominic Ng -- Chairman, President and Chief Executive Officer

Well, I mean we always interest -- I mean, you know, as you -- have you looked at our capital ratio. We always have the capital that allow us to look into various opportunities. It's just a matter of like when the right deal come along, we have the capacity from people perspective and capital perspective, you know, to -- actually to enter into a positive transaction. But you also have to take a look at where we are, you know, if we reflect that from the last -- very tiny acquisition that we made was in 2014 for Metro Bank in Texas, a very small institution for about $2 billion in size. And at that time since then, we've been growing organically. And we have doubled our size in less than six years. So we've done pretty well organic growth -- through organic growth. So our challenge really is more internal, the internal issue is that, how do we justify any acquisition when we have the ability to double our size in less than six years.

And so look like going forward, we still have that ability to continue to grow organically. And so from that perspective any kind of potential acquisition that we looked at, it needs to be very attractive, so I mean, that's what we're looking at right now. But when the attractive deal comes along, we absolutely will be interested to look at it. So again as repeat the same -- our philosophical view that I shared earlier is that we are shareholders friendly, we always do what's good for the bank and what's good for the shareholders.

Chris McGratty -- KBW -- Analyst

That's great color. Thanks. Just a follow-up on the deposit growth, the tremendous deposit growth you've seen this year. I'm interested in, kind of, any niches that are driving a disproportionate amount of that growth in the non-interest bearing. The ratios you gave, the high-30s% of total deposits is a great ratio. I'm just wondering what specific businesses might be driving that? Thanks.

Dominic Ng -- Chairman, President and Chief Executive Officer

It is coming from all over the place that is that -- if I look at the C&I industry verticals that we talked about. So each and every one of them contribute. Even in commercial real estate, we have new commercial real estate customers that they contributed. I would say -- and then of course retail banking, we're actually doing quite well. So I would say that not only each and every one of them contributed, I think, that I shared earlier in my remarks is that we brought in quite a few new customers would generate new deposits. And then we also got increase in deposits from existing customers, because through the years of investments in that core capability, our product enhancement in our cash management area. Our payment capability is getting better and better that in the past, we have customers that while we were having a lending relationship, we only get a smaller share of the DDA, because we did not have the technical capability to serve a more complex cash management business that some of our clients have, these are somewhat sophisticated larger customers the last few years through investing.

We continue to improve our cash management and treasury management capability and also FX etc. So that get us too and the position that we are getting a larger wallet share of these relationship with existing customers. So it's really a combination of both new and existing customers. And I do want to emphasize is that we bring in a lot of smaller retail customers. One customer at a time at the retail branches, despite the pandemic our branches were opened of this every single business day, and they are there to attract new customers. The PPP first round was very helpful in April from April to June. We actually brought in quite a few new customers. So it's all of the combination that get us into where we are today. So I can't think of any particular one that actually make that big of a difference, because it's just across the board.

Chris McGratty -- KBW -- Analyst

Thank you.

Operator

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

Jared Shaw -- Wells Fargo Securities -- Analyst

Hi, thanks. Just going back to -- I guess the margin discussion, I was surprised to see the securities book grow so much and you're able to maintain the yield. Are you changing, I guess, the dynamic of what you're purchasing there in terms of taking structure or credit risk in the portfolio? And I guess, can you talk a little bit about where you -- how you deployed that $1 billion and what you're buying in that?

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

Jared, yes. So in general, I would say we haven't really taken a lot of credit risk. We have extended the duration, the duration has gone up quarter-over-quarter. Well, honestly because of the steepening of the curve, but also the securities that we're purchasing. So as a comparison, we're about 3.84% as of 9/30 and that's inched up to 4.25%. And generally, if you look at the mix of the securities portfolio, not substantially different from what we've had before as far as what we're buying. But overall, certainly given the lower-for-longer environment, we are taking a long hard look at, kind of, what we're comfortable with from interest rate risk perspective.

And then as far as the increase, certainly -- and that's also a function really of us -- the comfort level as far as the deposit, the deposit growth that we anticipate and then, of course, especially with our commercial customers, sometimes, their balances with us can be go up and down depending on their cash needs. But as we realize that the excess liquidity throughout 2020 was going to continue, that's why we took the actions of paying off the PPPLF and then some of the securities, moving more to securities versus keeping in cash.

Jared Shaw -- Wells Fargo Securities -- Analyst

Okay. That was good color. Thanks, Dominic, I heard you talk about the increase -- increased pace of lending from Greater China. I guess, how do you think that's going to translate into the pace of cross-border trade expectations? And whether that's just pure lending or the opportunity could be growth from that type of business as well?

Dominic Ng -- Chairman, President and Chief Executive Officer

In terms of the Greater China region, I think that again, we will expect gradual increase in terms of activities. And our cross-border team in US actually have done well, both -- in fact, they've grown both in loans, deposit and fee incomes. And so what we are looking at in 2021 is also a continuation of gradual increase. Just because, you know, over the last four years under the Trump administration that create a lot of hostility between US and China. The way that I looked at East West is that we know the -- we have strong knowledge of the business environment, the political environment between US and China, and we are very -- with our size, it's much easier to be nimble to navigate accordingly.

So despite the fact that -- from the media perspective, the perception that US-China business are not doing much at all. But the fact as we somehow find a way to get the business, but as we go forward and looking at 2021 and beyond under the Biden administration, and I just expect that there will be more predictable approach and it will -- I think the Biden administration will bring more stability to the relationship. So from that standpoint, we will most likely be able to gain additional business just because that -- because of the more predictable and more stable environment that customers from both side will be more comfortable to continue to invest and so forth. There are going to be certain areas, some very -- what I call sensitive industry that affect national security, that obviously will no longer be able to conduct a lot of business between two shores. But there are plenty of business that are non-national security sensitive that I expect will continue.

Things such as, even, tourism, students attending colleges in US and some of the other general manufacturing, general industries and even in healthcare that do not have this, what I call, their essential purpose in United States, and we expect that there will be more trade and commerce that take place between the two countries. So we know what they are, and we will continue to target those business opportunities, that's why I expect that in the next few years there will be more opportunity to come.

Operator

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

Matthew Clark -- Piper Sandler -- Analyst

Hey, good morning.

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

Good morning.

Matthew Clark -- Piper Sandler -- Analyst

First question was just -- hi, my first question was just around the multi-family portfolio was down slightly this quarter. And the growth, I think in 2020 was about a quarter of what it was the prior year. Can you just speak to your appetite in that asset class? And whether or not, you're backing away from certain markets? And what's your -- what the prospects are for growth there?

Dominic Ng -- Chairman, President and Chief Executive Officer

We are not backing away from multi-family. We -- our approach has always been, you know, we work with our customers that we know well and that have strong credit history and whenever these customers request financing from us we'll jump into the opportunity. Now for multi-family there is one factor is the -- there are a lot of, you know, like Fannie Mae-type of pricing that is hard to beat. Sometimes we have customers that even they've been banking with us for many years and always look at us as a first right of refusal, but there are these very attractive pricing out there that it just makes sense for them to refi for a very low rate. And we respect that and then so from that standpoint, we have -- I would say that more like payoff due to refi for lower rate type of situation that caused our net growth to be slow.

Matthew Clark -- Piper Sandler -- Analyst

Got it. Okay and then just maybe for Irene, the FX and derivative fee income pretty outsized this quarter? Or is there something that would make that remain elevated here in the near-term or should we start to normalize that run rate?

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

Yes, I think from our customer income perspective it was a good quarter for both FX and the IRC. IRC, and if you -- the details of this Matthew, we have on Slide 19 of our deck, you'll see earlier in the year for IRC customer revenue was much higher. But I'll just point out for the fourth quarter, the CDA March were positive with the kind of uptick in the 10-year. And then also, kind of, lower kind of credit cost associated with the interest rate contract. So for the quarter, if you look at IRC total GAAP revenue was $13 million and approximately $6.2 million of that was customer facing income, and then the CDA adjustment was a positive $6.8 million. FX was up, we had many more kind of transactions in the fourth quarter, particularly kind of quarter-over-quarter and from the earlier part and we're optimistic that we'll continue to be able to grow FX year-over-year.

Matthew Clark -- Piper Sandler -- Analyst

Okay, great. Thank you.

Operator

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

Brock Vandervliet -- UBS -- Analyst

Great, thanks for the question. You covered Greater China performance already. I was just going to ask in terms of -- is that an area now, with the change of administration or incremental investment? Or do you really feel like you've already got the pieces on the board that you need?

Dominic Ng -- Chairman, President and Chief Executive Officer

Well, in terms of incremental investment, it depends on the opportunities. What we -- we have plenty of capital to allow the Greater China team to grow, if need to be, but East West have never really worked on a business model to rely on Greater China to keep fast pace of growth in order for us to generate the, kind of, meaningful financial performance for our shareholders. So Greater China has always be more strategically important than quantity-driven. So from that perspective, we'll continue to look into how we can use Hong Kong and our China team to look in opportunities.

Frankly in United States many of our domestic C&I business chose East West as the banker, because of our knowledge of the China business. And often many of them, either they're importer or exporter or they may be buying components from China and so forth have that interconnectivity between US and China. After all these are the two largest US and China the two largest GDP in the world, so that interconnectivities are there from many of the business through our US.

And our team in China who are able to help to provide advice and services in China or in US for our clients make a big difference and differentiate East West dramatically from other regional banks that we're competing with. So that part has been going well. Whether we will need to make additional investment or not, I think that will depends on any kind of potential changes in regulatory direction from US and China, and what kind of like potential opportunities may come. If there is a great opportunities, again, you know, the previous question about any kind of opportunity would be interested to look at, I'd always look at it as we look at it broadly. And any kind of opportunities that are -- have a high certainty to provide better return for our shareholders, we'll look at it. So at this stage right now, I don't really have anything specific to mention. I would just say that we are always on the look out to identify opportunities that to deploy our capital wisely.

Brock Vandervliet -- UBS -- Analyst

Got it. And more broadly, do you anticipate any changes in your business model coming out of COVID or not?

Dominic Ng -- Chairman, President and Chief Executive Officer

Not anything dramatically. No, I would say that we have always been very much running our organization with a very, sort of, like diversified approach in terms of making sure that we touch on many different industries in US and we have a good percentage of loans in C&I and then well-balanced between C&I, CRE and single-family mortgages from the consumer side. And we are generating the stronger fee income every year from wealth management to foreign exchange and then cash management fee income and interest rate swap, etc, etc.

So that is still going to be in place and we always going to make sure we have a good balance between commercial banking and retail banking. There are not many banks out there, they're competing with us right now with our size that actually have the strong retail banking business like we do. And so that's a big advantage for us and we'll continue to grow our consumer retail banking business going forward.

And the other element of Greater China, is that -- as I said earlier, with this two big GDP, the world's largest and the second largest and there are plenty of business for us to identify, particularly for an organization like East West that don't really have much competition against us, because most of the US banks really do not have this part of the growth element. So we look at all of that, is why, you know, for years we set our mission and vision in terms of -- and our business model to focusing on in this direction. And I would say that this is more or less the same direction, that will be focusing on in the next 10-years or so. So at this point, we're very comfortable with our business strategy going forward.

Brock Vandervliet -- UBS -- Analyst

Great. Thanks for the color.

Operator

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

David Chiaverini -- Wedbush Securities -- Analyst

Hi, thanks. I wanted to follow-up on loan growth. C&I growth you mentioned, you know, turned positive in September and momentum continued into year-end. You also mentioned that pipelines have positive momentum as you, kind of, look out from here. But you also mentioned to expect slower growth in C&I in the first half of '21 versus the second half of '21. So should we expect, kind of, similar C&I growth in the first half of '21 versus the annualized growth in the fourth quarter, of course on an ex PPP basis? And then a further pickup in the second half from there?

Dominic Ng -- Chairman, President and Chief Executive Officer

No, as I mentioned, I think that maybe in one of the Q&A earlier. Our -- keep in mind our fourth quarter annualized growth rate was 18%. But if you look at the second half of the year, our annualized growth was 7% for C&I, right? 7%, so we're using the 7% run rate as what we expect it for the year. And at this stage, you know, we figure out in the current environment -- just looking at the current environment with -- we're still trying to figure out, do we have enough vaccine for everybody? Or how many more variance of the Coronavirus that may popped up. We just looked at it, is that maybe the first quarter and two, we wouldn't be expecting business to be coming back as business as usual as a strong. But I would expect that after this -- by the summer or after the summer, you know, business is going to come back really stronger, because most of the economy is going to get back into normal. So that will be a pickup then.

So, keep in mind that while we're booking commitment, as you look at the utilization rate, we are at somewhat of an all-time low, because normally in the past we'll always have about 80% utilization rate, we dropped it down to 70%, as the business are not drawing -- many of them are not drawing down their lines. So we are very pleased that we can book new business, bringing new customers, but many of them are still hunker down and not drawing the lines and until the economy really see some, sort of, like normalcy, I would expect that business will continue to be hesitant to actively draw down the line and actively engage in the full-flung business.

So from that standpoint, that's why we think that chances are it's going to be a little bit slower in the first two quarters and then picking up a little bit stronger in the third and fourth quarter. One other factor is that there is always seasonality for some of our C&I business, that in general things tend to slowdown. Particular, expenses slowdown in the first and second quarter, because particular the business, you know, cater to consumer retail, and there is always like stacking up the inventory right around near the end of summer, and then start stacking it up, all the way till near Christmas. And that type of core business that we have for years is still a meaningful size of business in our C&I portfolio. And we expect that those business will continue to behave accordingly, which is a little bit slower in the first and second quarter, a little bit stronger in the third and fourth quarter, because of the utilization behavior. So from that standpoint, I think it's a combination of different factors that cause us to conclude with this sort of like forecast.

David Chiaverini -- Wedbush Securities -- Analyst

Thanks for that. Very helpful. And then shifting to a question on credit, the oil & gas portfolio, classified loans were $240 million down 13%. So clearly, stress is easing in this portfolio. Would it be fair to say that the base case is for continued improvement in the oil & gas portfolio and there's potential for reserve releases here?

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

Yes, I would say that's not outside of the realm of possibility. At this point in time, you can just see from the information that we shared. We did kind of inch up the reserve ratio at year-end, compared to 9/30. Just honestly given kind of the environment, we wanted to maintain kind of a conservative view about that. But I would say that if things continue to improve, the reserve release is within the realm of possibility.

David Chiaverini -- Wedbush Securities -- Analyst

Thanks very much.

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

Operator

[Operator Closing Remarks]

Duration: 74 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 -- Truist Securities -- Analyst

Dave Rochester -- Compass Point -- Analyst

Chris McGratty -- KBW -- Analyst

Jared Shaw -- Wells Fargo Securities -- Analyst

Matthew Clark -- Piper Sandler -- Analyst

Brock Vandervliet -- UBS -- Analyst

David Chiaverini -- Wedbush Securities -- Analyst

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