And welcome to East West Bancorp's Third Quarter 2021 Financial Results Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I would now like to turn the conference over to Giuliana Balistra, Director of Investor Relations.
Please go ahead.
Thank you, Tom. Good morning,
and thank you, everyone, for joining us to review the financial results of East West Incorp. For the Q3 of 2021. With me on this conference call today are Dominic Keene, 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 And 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 ks for the year ended December 31, 2020. In addition, some of the numbers referenced on this call pertain to adjusted numbers. Please refer to the bank's regulatory filings containing
the 8 K filed today
As a reminder, today's call is being recorded and will also be available in replay format on our Investor Relations website. I will now
turn the call over to Dominic. Thank you, Juliana. Good morning. Thank you everyone for joining us for our earnings call. I will begin the review of our financial results with Slide 3 of our presentation.
This morning, we reported Q3 2021 net income of $225,000,000 or $1.57 per share. Strong organic balance sheet growth drove a 21% annualized increase in revenue quarter over quarter to 469,000,000. The increase in revenue solidified with expense discipline drove pre tax pre provision income growth of 26% annualized for the Q3 to $302,000,000 Our protect to provision profitability ratio Continues to be industry leading and was 2% for the Q3 of 2021. We recorded a negative $10,000,000 provision for credit losses this quarter. As the quality continued to improve, Nonperforming assets decreased quarter over quarter and net charge offs remained low.
At the same time, we maintained a healthy allowing for loan losses at 0.38 percent of loans as of September 30, 2021. In sum, we returned an attractive 1.5% on average assets, 15.7% on average equity and 17.2% of average tangible equity for the Q3 of 2021. Slide 4 presents a summary of our balance sheet. As of September 30, 2021, our total assets crossed 60,000,000 And total loans reached a record of RMB40.5 billion. Excluding Paycheck Computing Program loans, total loans or 11% annualized from June 30, 2021.
3rd quarter and commercial real estate. Year to date, for the 1st 9 months of 2021, loans grew 10% annualized, Excluding P and T, for the full year of 2021, we are increasing our loan growth outlook to a range of 10% to 11%, up from our prior range of 9% to 10%. Throughout 2021, loan growth has been broad based across all our portfolios and teams. And at this point, this business will continue for 2022. Overall, We anticipate that C and I loan growth will be the strongest based on continued good execution from our front line and a rebounding economic backdrop.
In the prior quarter, deposit growth continued to be very strong. As of September 30, 2021, total deposits reached a record of 53,400,000,000, 774,000,000 or 6 percent annualized from June 30. Noninterest bearing deposits grew 1,400,000,000 or 25 percent Annualized to a record 23,200,000,000 as of September 30, making up 43% Our total deposits at quarter end and up from 36% in year over year. Turning to Slide 5, you can see our strong capital ratios. As of December 30, 2021, we had a common equity Tier 1 ratio 12.8 percent, total capital ratio of 14.2% will provide us Book value per share and tangible equity per share were both up 3% Quarter over quarter, East West Board of Directors have declared 4th quarter 2021 dividends for the Company's common The common stock cash dividend of $0.33 is payable on November 15, 2021 to stockholders of record on November 1, 2021.
Moving on to a discussion of our loan portfolio, beginning with Slide 6. C and I loans outstanding, excluding CPP, were RMB13 1,000,000,000 as of September 30, 2021, an increase of 21% annualized from June 30. Total C and I commitments were RMB18.9 billion As of September 30, a sequential increase of 26% annualized. We achieved this strong rate of C and I growth despite a slight lower utilization rate, which was 69% as of September 30, compared with 70% as of June 30. On an average basis, C and I loans excluding PPP grew by 16% annualized in the 3rd quarter.
We expect to continue to see strong growth in C and I loan balances and commitments Net quarter loan growth was spread across our lending teams and geographies. By Industries, we saw strong net growth this quarter from technology, private equity, consumer goods, General Manufacturing and Wholesale and Entertainment. It was indeed a well diversified quarter In terms of growth, I would also highlight that the private equity growth this quarter well exemplified our cross border business. Growth came from clients, Thomas Hart in the United States, Hong Kong and in Mainland China. Accounting for 4% of our total loan portfolio were RMB1.7 1,000,000,000 Chablon Pharmaceuticals in our China subsidiary bank and our Hong Kong branch, 98% This portfolio consists of C and I loans, well diversified by industry.
These loans are up from 1,600,000,000 as of June 30. Slide 7 and 8 shows the details of our Commercial real estate portfolio, which is well diversified by geography and property type and consists of low loan to value loans. Total commercial real estate loans were $16,500,000,000 as of September 30, 2021, up by 4% annualized from June 30. This quarter, we saw strongest growth by property type and industrial CRE and multifamily mortgage. In Slide 9, we provide details regarding our residential mortgage portfolio, expenses of single family mortgages and home equity line of credit.
Residential mortgage loans were $11,000,000,000 as of September 30, 2021, growing by 9% annualized from June 30. During the Q3, we originated RMB982 million of residential mortgage loans, which was down from a record setting of 2nd quarter, but up by 20 8% from origination in the year ago Q3. I will now turn the call over to Eiry for a more detailed discussion of our
asset planning and income statement. Eiry? Thanks, Dominic. I'll start with our asset quality metrics on Slide 10. Overall, our key asset quality metrics continue to improve quarter over quarter.
Total criticized loans were down sequentially by 2% to $1,000,000,000 or 2.5% of total loans as of September 30, 2021. Year to date, criticized loans decreased by 17% and the criticized loan ratio improved by 67 basis points from 2 point percent of loans as of December 31, 2020. Total over quarter, non performing assets were down by 24% to $173,000,000 or 28 basis points of total assets as of September 30th. Year to date, Non performing assets decreased by 26% and the non performing asset ratio improved by 17 basis points from 45 basis points of assets. The 3rd quarter improvement in non performing assets is largely driven by commercial real estate and oil and gas resolutions.
Our oil and gas loan portfolio has continued to decrease. The commitments are now below $1,000,000 As discussed previously, Our goal was to reduce commitments to this level. This is about the right size for us. On Slide 11, we present the components of our allowance for loan losses. Our allowance totaled $560,000,000 as of September 30, 2021, 1.41 percent of loans excluding GPP, Compared with $586,000,000 or $152,000,000 as of June 30th.
A quarter over quarter reduction in the allowance largely reflects an improved macroeconomic forecast. Net charge offs were essentially unchanged at $13,500,000 in the 3rd quarter compared with $13,300,000 in the 2nd quarter. The net charge off ratio was 13 basis points of average loans annualized For both the 3rd and second quarters, during the 3rd quarter, we recorded a negative $10,000,000 provision for the credit losses with a negative $15,000,000 provision in the 2nd quarter. Currently, we expect to record a negative provision of approximately $10,000,000 for the 4th quarter, similar to this quarter. And now, moving on to a discussion of our income statement on Slide 12.
This slide summarizes the key line items Of the income statement, I will discuss in more detail on the following slides. In non interest income, included in interest rate contracts and other derivatives, Our mark to market adjustments, which were positive $2,500,000 in the 3rd quarter compared with a $5,000,000 loss in the 2nd quarter. These primarily relate to changes in the credit valuation adjustment. On this slide, the CBA marks are included under the other Amortization of tax credits and other investments increased this quarter to $38,000,000 compared with $27,000,000 in the 2nd quarter reflecting the impact of investments that closed during the Q3. For the Q4, we anticipate that the amortization of cash And other investments will be approximately $30,000,000 The 3rd quarter income tax expense was $48,000,000 And the effective tax rate was 17.5%.
The year to date effective tax rate for the 1st 9 months of 2021 was 16%, and we expect that the 2021 full year effective tax rate will be approximately 17%. I'll now review the key drivers of our net interest And Edinger's margin on Slides 14 through 16, starting with the average balance sheet. 3rd quarter average loans of $40,000,000 grew by $338,000,000 or 10 quarter annualized and by $1,100,000,000 or 12% annualized excluding PPP. Dollars 645,000,000 Our PPP loans were forgiven by the SBA during the Q3. 3rd quarter average deposits of JPY 3,500,000,000 were up by JPY 3,300,000,000, up 26% mid quarter annualized, compared to a growth in non interest bearing demand deposits, which increased by $3,500,000,000 As of strong deposit growth, our average loan to deposit ratio was 75% in the 3rd quarter, down from 79% in the 2nd quarter.
Average earning assets growth in the 3rd quarter reflected the strong deposit growth. On an average basis, interest bearing cash and deposit expense grew $2,000,000,000 securities increased by 786,000,000 and repurchase agreements decreased by $253,000,000 Turning to Slide 14, Q3 2021 net interest income $396,000,000 was the highest quarterly net interest income in the history of East West, or about 20% linked quarter annualized. Income related to PPP loans was $15,000,000 in the 3rd quarter, consisting of $12,000,000 of deferred fees and $3,000,000 of interest income. As of September 30, we have $13,500,000 of PPP deferred loan fees remaining to Elk Creek. Quarter over quarter, GAAP net interest margin contracted to 2.70 in the 3rd quarter, a decrease of 5 basis points from the prior quarter.
Excluding PTC, the 3rd quarter adjusted net interest margin of 2.64 contracted by 9 basis points sequentially. As you can see from the waterfall chart on this slide, variability of our net interest margin comes from excess liquidity. The quarter over quarter decrease and the net interest margin for the Q3 was largely driven by the increase in average cash and interest bearing deposits Thanks to the strong average deposit growth. The impact of this was a negative 10 basis points to the margin. Margin headwinds from incremental lower asset yields was offset by lower cost of interest bearing funds and a higher share of DDA down non interest bearing, excuse me, DDA In the deposit mix, quarter over quarter, our robust net interest income growth came from loan growth and incremental purchases of securities and repo agreements.
And for the full year, we expect NII growth of 10% to 11%, excluding the impact of PPP. Turning to Slide 15. The 3rd quarter average loan yield was 3.61 and excluding the impact of PPP, the adjusted loan yield was 3.56, down by 2 basis points from $358,000,000 in the Q2 of 2021. Turning to Slide 16, our average cost of deposits for the 3rd quarter dropped to 12 basis points, an improvement of 2 basis points from the 2nd quarter. The spot rate on total deposits was 11 basis points as of September 30th, We're also down by 2 basis points from June 2nd.
Our cost of deposits declined as maturing higher rate TVs repriced to current market And we lowered the rates paid on other accounts. The average cost of CDs in the 3rd quarter was 35 basis points, a drop of 5 basis points from the 2nd quarter. In the Q3, we originated or renewed $5,300,000,000 of domestic CDs at a blended rate of 19 basis points and a weighted average duration of 4 months. Over the course of 2021, living with higher priced CDs have already repriced down. In the Q4, we have $4,100,000,000 of domestic CDs At a blended rate of 0.5 basis points, of which $900,000,000 originated when deposit rates were higher with a blended rate of 37 basis points.
Moving on to fee income on Slide 17. Total non interest income in the 3rd quarter was $73,000,000 an increase from $68,000,000 in the 2nd quarter. Customer driven fee income and net gain on sales of loans was $63,000,000 essentially flat compared with the 2nd quarter and up 41% Year over year, quarter over quarter growth in deposit account fees and interest rate swap revenue And SKA loan sale gains was offset by decreases in lending fees and in wealth management. Year over year, The growth in CNGM reflects new customer acquisition, particularly for GQF and FX beyond refunds and COVID related costs. Beyond quarter to quarter volatility, we are positive about the year over year trends in fee income and momentum for future growth.
Moving on to Slide 18, 3rd quarter non interest expense was $205,000,000 Excluding amortization of tax credits and other investments and quarter positive net income amortization adjusted non interest expense of $167,000,000 in the 3rd quarter, an increase of 5,000,000 or 3 percent sequentially. The largest quarter of a change was in other operating expenses, which increased largely due to higher loan related expenses and charitable contributions. The 3rd quarter adjusted efficiency ratio was 35.6% compared with 36.6% in the Q2. While achieving industry leading efficiency, we continue to make investments in With that, I'll now review our updated full year outlook For 2021 on Slide 19, we've updated our full year 2021 outlook relative to a quarter ago. For the full year of 2021 compared with our full year 2020 results, we expect year over year loan growth, excluding PPP, in the range of 10% to 11%, up from the prior range of 9% to 10%.
Year over year adjusted net interest income growth excluding CTC in the range of 10% to 11%, Unchanged from our prior outlook. Our increased loan growth outlook is a good foundation for robust net interest income growth in 2022, even though it does not materially shift the full year 2021 growth outlook. Adjusted non interest expense growth, excluding tax credit amortization of 5%, unchanged from our prior outlook. Based on our macroeconomic forecast and loan growth outlook, At this point, we expect to book a negative provision for credit losses of $10,000,000 in the 4th quarter, similar to what we recorded in the 3rd quarter. This is a change from our prior outlook of 0 provision expense in the second half of the year.
We currently expect that the full year 2021 effective tax Rate will be approximately 17%, excluding the impact of tax credit investments. We also anticipate that the amortization of tax credits and other Investments will be approximately $30,000,000 for the 4th quarter. This is an update from our prior outlook of a 15% full year tax rate. With that, I'll now turn the call back over to Dominic for closing remarks.
Thank you, Irene. In closing, we saw another quarter of outstanding results for East And we expect a strong finish to 2021. I will now open up the call to questions. Operator?
Thank you. We will now begin the question and answer session. And the first question comes from Shukran Poonawala with Bank of America.
Please go ahead. Good morning.
Good morning. And just Dominic, you mentioned expectations for strong loan growth into 2022 driven by C and I. Just talk to us, you had pretty strong growth even this year as you revised the business for the last three quarters. As we think about DQ, Why loan growth probably is not going to be somewhere in the mid teens? Can you see that change?
Just give us a sense of like what could be the risk of that level of growth next year given the rest of the
Well, I mean, at this point, we see that the trajectory is for 2022 will be somewhat Similar to what we're currently experiencing, it's too early of a stage right now for us to provide guidance for 2022, we always provide our 2022 guidance in our January 4th quarter call. So, good. So, so far, if I look at the pipeline in the Q4, things are going really good, I mean, particularly in the C and I sector, and we feel that we will be able to continue to have that kind of growth based on what we share in our guidance To end the year at 10% to 11% annualized growth.
Got it. And just right to that, you mentioned the loans in the China sub up from 1,600,000,000 to 1,700,000,000. Just remind us in terms of the strategy there, are there things that you're doing a bit differently today versus 2 or 3 years ago That could lead to a lot more growth contribution from the China sub over the next year and going forward?
In terms of China, our impact, I would say the overall East West Bridge Banking strategy, we find ourselves The potential bridge between the East and the West, and we've always looked at our value proposition comes from our Knowledge and expertise of knowing the regulatory change in both U. S. And China. And because of that, we can help business. Our Chinese business to do We do business more effectively in United States and vice versa.
So, we actually are able to in fact, for the last 12 months, I would say that we will benefit tremendously from continuing to build new business in U. S. That have cross border entities. You see that in our C and I Loan growth, you see that in our some of our CRE loan growth and absolutely so in FX And Treasury Management, fee income growth. So, The cross border banking business has helped us tremendously in United States.
Now, the China part and Hong Kong, both Hong Kong and Mainland China, Our strategy has always been that because we have the knowledge, because we also have a presence that will continue to be Good high quality cross border business in U. S. That is the main part. Now, but in the meantime, Obviously, we're still growing in China. What you notice is that the percentage growth of loan in China Maybe higher than U.
S. Because the base is smaller. Keep in mind that we only I mean, the RMB1.7 billion is only 4% of our total loan. So if next year, they will grow in a percentage within their own region By, let's say, 15%, 20%, it's not something that's surprising at all. It's something that is a given simply because that base is so low.
We're not we're going to be comfortable to let it grow to whatever the size it should be Based on the needs, the most important thing is that we are looking at high quality Asset growth and clients that is core and have business that is expandable, Sustainable and profitable. And because the base is small, so we got plenty of room. So, but we're not Out there trying to aggressively grow the China portfolio just to make sure that even now the percentage or anything like that It's all based on what are the clients that we can actually keep banking with. And when we find 1, to work with them. And that's pretty much our philosophy.
And so far, we've been benefiting tremendously, Thank you.
The next question comes from Ken Zerbe with Morgan Stanley. Please go ahead.
I guess, two questions. So first of all, can you just help us think about how to model out The credit valuation adjustment and administrative contract line, I mean, obviously, it was great this quarter, but just want to understand the sustainability. Thanks.
Yes. I mean, I think the CVA adjustment is really a function of kind of assumptions around The credit component of it, but also largely what's happening with rates that 10 year So honestly, I think it's hard to model that, point to point in particular. But I think if you follow as far as what's happening with And that's probably the largest indicator that's helpful, Ken, in trying to understand what the market is going to be quarter over quarter.
Got it. Understood. Okay. And then just a second question. Your non interest bearing deposit growth has just been Outstanding.
I think it was up over 17% sequentially this quarter. Can you talk about what's driving that growth?
Yes. We're delighted with the growth that we have had in deposits. Across the board, if you look at it from our retail branches, consumer accounts, the number of accounts have increased, customers have increased. Small business, we've been very successful with kind of promotions and then also product packages that we've created That really meets the needs of our small business customers. I think with that, probably from a dollar perspective, the largest growth Got it.
From the perspective of investments that we've made the last several years for GTS products, capabilities and people, We're really being able to utilize that and help our customers. So the long and short of it is, we're very excited about the growth, the customers that we've onboarded. We think that, that is something that can continue. Realistically, I would say, Ken, though, there is a certain amount of with kind of the stimulus, The kind of the monetary policy, there is a certain amount of excess deposits in the system and we're realistic about that as well. But overall, I think the trends are very positive, and we think that we can continue to deposit growth momentum.
Next question comes from Dave Rochester with Compass Point. Please go ahead.
Hey, good morning, guys.
Good morning. Back on the deposit commentary, that all sounded great. I was just curious If you think that momentum can effectively cover loan growth that you guys are expecting next year, do you think on that loan growth and deposit growth?
Well, we are currently at 75% loan to deposit ratio. So, we got a lot of questions, Right. That's something that I think that is the loan to deposit cushion that obviously causing some of the margin pressure. But obviously, we have such a strong net interest income growth Our volume will overcome this margin compression. The The way I look at it is that we've got plenty of room.
So that would not be a concern for us for now. And we still expect continued deposit growth simply because We'll continue to bring in new clients. I look at the pipeline for our C and I. There are going to be new clients that we'll be looking. When they come in, Yes.
We provide a loan commitment to them. It comes with operating accounts and then excess So now I do wanted to mention that it is indeed Back in 2020, in the second half of last year At WTTTP, we just did a quite a tremendously great job and generate a lot of goodwill and brought in a lot of new clients. And we were able to benefit from that and talk to a lot of new customers and still continue to do that as well and get new clients referral. So I would expect that in maybe in 2022, Maybe that new client acquisition may not necessarily be as strong as The last year, year and a half or so, something because it's somewhat unusual in 2020 for that PTC situation. But, you said, well, sometimes one customer is not happy to tell 5, 10 of their friends and then we'll continue to pick up Business, this will be something that I would expect that maybe it can continue on for the next several years, but in terms of The velocity of growth may not necessarily be as strong from these deposits also the commercial deposit side.
That would make sense. Good. And maybe just for my follow-up, switching to fees, you mentioned seeing A lot of them in there for future growth. I was just wondering, you've got a lot of contributing lines here. Where do you expect to see the strongest growth?
And I know it's probably difficult, but how are you thinking about the pace of that growth going forward?
I think that for if you look at these different line items, like foreign exchange and The cash management, treasury management, from the deposit side, these are the areas that we have tremendous growth because as we just mentioned about 2 things. One is that domestic commercial smallmiddle size business that are moving their business in relation Over to East West have generated a lot of fee income in our treasury management Nine item. The other one, cross border business that I mentioned earlier. We have a lot of New cross border clients gain foreign exchange fees and also treasury management area. Those are the 2 that I would say that pretty much In addition to our mention of our PPP and in terms of the China situation, actually more U.
S. Banks may not be as Excited about working with Chinese subsidiary company in United States that we end up Benefiting from it, we also have a situation of internal technology improvement. As we talked about the last 2 or 3 years, We have continued to invest in upgrading our technology platform, our system and our product offerings. So these product offerings, particularly in the treasury management area, have put us in a position that we have the ability to service much larger commercial clients with more complexity in terms of their cash management needs. So all of that have resulted in us having this kind of growth.
Now, we think it will continue. But in terms of the pace, Volume and so forth, we will I think that we will need to take a look. I mean, at this point, my sense is that If we do not continue to innovate and continue to provide come up with new products, we'll probably slow down, But East West doesn't we can't just sit and wait for all the business come in. We'll continue in 2022 to develop new product capability and looking to even newer geographic area and start identifying new prospects. And through that, we'll continue to upgrade our system too and provide even better product.
And through that, hopefully, we'll continue to maintain some sort of momentum going forward.
Great. Appreciate all the color there. Thanks.
The next question comes from Jared Shaw with Wells Fargo Securities. Please go ahead.
Hi, good morning. Thank you. I guess shifting back to the growth outlook and the optimism there. Can you comment on the difference I guess your expectation that customers increase the loan optimism and the utilization rate starts trending back to normal versus the Success you had with acquiring new customers, are you expecting the 'twenty two season normalization Of utilization rate? And I guess if not, what's holding those customers back?
Well, I think the utilization rate will have a lot to do with how the U. S. Economy is going to be like in 2022. As we shared with you at our remarks that the utilization rate, Now, our C and I dropped from 70% to 69%, just slightly. If you look at the loan growth, Our C and I loan balance growth was 21% annualized, and then our commitment growth Was higher as was it 26% or 28%, something around that range.
So we actually brought in more customers, so we booked more new loans. I just haven't been funded yet. What I look at in 2022, I would expect that customer will actually increase the utilization, but I would expect that even 4 or 5 months ago, it didn't happen. It's just coming down. So it's just a matter of time.
It's a matter of time. I mean, something that I wish I had the first of all to predict what the economy is going to be like to give Our clients have confidence to start drawing up the line. But as of today, Overall, among a well diversified portfolio with many different industries, somehow it average out to more or less the same. And we'll see what it's going to be like in 2022. Just like interest rate, every year we wave A little bit of a future hike can happen, but eventually at some point, it will happen.
So I would expect that the utilization rate also at some point
Thanks. And then just my follow-up. The capital continues When you look at the dividend payout ratio, it's under 21%. You have the buyback authorization out there. What are your thoughts on Capital Management more broadly and then the buyback more specifically now that the worst of COVID fears are behind us.
Yes. 1st and foremost, our focus on returning the capital to shareholders is the form of Strong organic growth and being able to utilize that in the most optimal way. We do have the authorization outstanding. It's been a while, so honestly at this point, we go back to the Board with any actions that we would take. And that's not something that we're evaluating at this point in time, quite frankly, Because of the growth that we have and the optimism we have, on the dividend side, generally speaking, on an annual basis, the discussion with the Board, we evaluate I want to make sure that the dividend payout ratio and the yield are appropriate, especially relative to our expectations about the utilization of capital And then also relative to their peers.
Thank you.
You're welcome.
The next question comes from Brandon King with Trulist. Please go ahead.
Hey, good morning.
Good morning.
So CRE Growth, You mentioned industrial and multi family being the sources of that. While it was a little slower than 2Q,
what was
the level of pay downs in the quarter compared to last quarter? And how
Generally, we expect that no, CRE is top. On the pricing, we see that as far as a lot of competition. And so our focus has been clients where maybe we're not just competing on price and structure. Overall, as we look at the pipeline and what we Back then, we do think 4th quarter is a little better, Q3. And then also at this point in time, given the visibility that we have, we also think that the payoff
Okay.
And Ready Mortgage was once again strong this quarter. Could you just remind us what was the purchase and refinance mix volumes? And is what certain reasons are pointing that in others when it comes to registered mortgage? I
So, Brandon, I don't have those exact Generally speaking, at this point in time, most of the loans that we're originating are refinancing are purchased, excuse me, versus refinance. That change has happened for a period of time. And for us, I think in the markets that we're in and the markets that we have strong branch presence, As you know, most of the feed on referrals that come in through our branch network, our volume of origination It's predominantly in areas where we have lots of branches, California, Southern California and Northern California and then also New York Metro.
And lastly, with provision guidance with another negative provision expected in 4Q, Just some rough assumptions with a charge offs level of around,
I guess, like second quarter.
It looks like the loan loss reserve could be around $130,000,000 or a little below $130,000,000 Is that kind of a trough level Can your outlook now or can you expect or even lower in 2022?
Yes. That's a great question. As you know, the allowance tocilosum is largely driven on the macroeconomic outlook. Of course, I think as we look at it and part of the reason I think where we felt that the negative part of it is driven by the macroeconomic outlook. And as that improves, I think that's why we ultimately had to put the negative provision.
On a go forward basis, I'll say that that continues to drive it. I think as a trough perspective, and your numbers are not I think that's not complex math there, about 130 or so. That is something I think that's within the realm of possibility in the Q4. And then if you look at 2022, depending on the macroeconomic forecast,
The next question comes from Brock Vandervliet with UBS. Please go ahead.
If I got the number correctly,
it sounded like your originations there were about 1,000,000,000 From a year ago, that seems really strong. I'm wondering if that's and I'm just wondering What's driving that? Because we're really not seeing that across the board where year over year increases are much closer before
I ask. Are you talking about year to date or are you talking about just the quarter?
Year over year, I thought the number was 28.
Year over year. Okay. Sorry, can you repeat the question? So, you're saying that as a year to date origination is about 1,000,000,000 above last You were wondering why is this so strong?
Exactly. It seems Very outsized. I was just wondering what was driving it.
Yes. We have a very unique product, Right. Most of what we're doing is a reduced stock, but high down payment, single family and HELOC product. And I think for our customer base, this is something that's very attractive
for them. Well, because I think you are looking at the combination of We choose Refi and HELOC, right? And we have done Really well, actually, not just for the last 12 months. We have consistently done well with residential mortgage, I would say for the last 3 or 4 years. Now, for instance, everyone in the banking industry and in the mortgage Business has done well because the rates have come down and which benefit The only difference is that our customers tend to pay anywhere 40%, 50% or more down payment.
Beyond that, I mean, the other characteristics is more than sustained because the overall market has been really strong and there's a lot of purchase and refi going on.
Got it. Okay. And as a follow-up, it looks like you got comfortable in terms of where rates were I just went pretty aggressively into investment securities in the quarter. Any sense of where
That's a hard question to answer. I'll talk about what we did and the deliberate actions we took in the Q3. Overall, in the Q3, we knew that we have about $300,000,000 of securities that were called and matured, so we redeployed some of that. Also, the ongoing analysis of cash and the deposit levels that we had. And then additionally, as we said before in our prepared remarks, We had $650,000,000 of PPP loans and we reported that cash as well.
So we took all this into consideration. Generally speaking, The security that we did purchase, we wanted to be mindful with the duration, which was a little bit lower than the existing duration as of 30 of the portfolio, just keeping in mind, being able to kind of redeploy our excess cash into earning assets, but maintaining kind of the duration that we think the price is going. Now that's been the focus that we've had. In the Q4, depending on the cash Activity that we have, the excess facility, certainly, this is something that we're evaluating as well, but we're really not extending the duration out of our.
The next question comes from Chris McGratty
with KBW. Please go ahead.
Hey, good morning.
Good morning.
Good morning. There's been a lot of discussion on quarterly calls this earnings season about inflation and costs. And then in costs, I'm interested you guys have done
a really nice job over
the years to keep costs contained and have operating leverage. So I'm wondering the ability to hold that to year end and into next year?
Well, we didn't hold back much. We have a 5% growth in expenses, which Somewhat painful in my view, but then we need to spend what we need to spend, that is that investing into the system, continue to improve our product capability and most importantly, pay our people and recruiting new talents and then promoting talents within. And those are the things that we'll be doing year in and year out and will continue to do in 2022. Frankly, if you recall, we used to have maybe 2% to 3% Type of year to year expenses increase and then we ratchet up to 5% and then end the guidance. And so, those are kind of things that we because of in anticipation of inflations out there that we will need to spend more It's appropriate.
And then also depends on how the economy goes and then the business go and then we will continue to If we continue to grow even stronger and require more manpower, we're not going to shy away from increasing the expenses to support the business, because the revenue will always take care of ourselves. So, I would look at it is that I wouldn't be too focused on and can only go By a certain percentage, there's a most prudently and wisely and whatever we said It's going to add into more profit more revenues and more profitability and then allow us to have more sustainable growth. And that pretty much is the philosophy of KeySmart's strength.
Great. If I could follow, so
it sounds like that 5% already reflects Any wage pressures that might be set up and anything above it, Dominic, would just be correlated to revenue growth, stronger revenue growth.
At this point, the 5% is what we've projected for the end of the year. And 2022, obviously, we'll provide additional guidance.
Next question comes from David Ciarini from Wedbush Securities. Please go ahead.
I wanted to ask about loan For CRE, I was curious about how it looks on the C and I side. And then More broadly, when I look at the average loan yield in the quarter at 3.61%,
I was curious how that compares to
Okay. David, I can kind of give you kind of information as far as where the new loan yields are. Generally They're holding up okay. If we look at I'll just go through all of them for you. Single family, As we look at where we were, we were at on an average of About 4.20 for September.
If you look at CRE, including multifamily, we were at about 3.50 as far as Low yield holding steady really from where we were before. And C and I and new originations, they're up a little bit, portfolio yields of 3.40 or so for new originations in the 3rd quarter.
Great. Thanks very much.
Next question comes from Clark Wright with D. A. Davidson. Please go ahead.
Good morning. This is Clark Wright filling in for Please
enter. I would appreciate if I could
get your thoughts on deposit duration and I would just since I was working at your bottom line, how the duration and how it's impacting your deployment strategy?
So, of course, this is Shuliana filling in for Irene. We will repeat the same Pattern, in terms of our modeling of deposit duration, we take a look at the expected life of the deposit in terms of our modeling forecast department. So for example, Customers with a long history with us, multiple years, we have an expectation of a lifetime of stay there demand deposit. Customers with demand deposits due to corporate say an IPO or some other corporate Those are shorter duration life expected life of deposits. So we modeled that in as well in terms of our forecasting of cash balances at organization and then attributing an ability to redeploy that into whatever appropriate earning asset.
Okay. I'll just add, thanks, Juliana, for filling in, that overall, as we talked about before, We've seen great growth in commercial deposits. Operating accounts, whether for small business or for larger companies, so those are long duration assets. I think with that, as with part of our analysis, we also look at what kind of surge deposits there are. And certainly, as Juliana noted, some of those will evaluate and look at it And it's got the shorter line.
But overall, relative to where we were before, before these last couple of years, And the changes that we've been able to make in our deposit base over the last few years, I'd say that deposit duration is something that has certainly improved.
This concludes our question and answer session. I would now like to turn the conference back over to Dominic for closing remarks.
Thank you all for joining our call, and we are looking forward to speaking with you in January of next year. Thank
you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.