Earnings Call: Q3 2019

Oct 17, 2019

Good day, and welcome to the East West Bancorp's third quarter 2019 earnings conference call and webcast. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Julianna Balicka, Director of Strategy and Corporate Development. Please go ahead. Thank you, Sean. Good morning, and thank you everyone for joining us to review the financial results of East West Bancorp for the third quarter of 2019. With me on this conference call today are Dominic Ng, our Chairman and Chief Executive Officer, and Irene Oh, our Chief Financial Officer. We would like to caution you that during the course of the call, management may make projections or other forward-looking statements regarding events or future financial performance of the company within the meaning of the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements may differ materially from the actual results due to a number of risks and uncertainties. For a more detailed description of risk factors that could affect the company's operating results, please refer to our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2018. In addition, some of the numbers referenced on this call pertain to adjusted numbers. Please refer to our third quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures. During the course of this call, we will be referencing a slide deck that is available as part of the webcast and on the investor relations website. As a reminder, today's call is being recorded and will also be available in replay format on our investor relations website. I will now turn the call over to Dominic. Thank you, Julianna. Good morning, and thank you everyone for joining us for our third quarter 2019 earnings call. I will begin our discussion with a summary of results on slide three. This morning, we report a third quarter 2019 net income of $171 million, or $1.17 per share, both up by 14% compared to second quarter net income of $150 million and $1.03 per share. East West achieved record operating revenue of $421 million and record net interest income of $370 million in the third quarter. In this challenging interest rate environment, we are pleased with the modest quarter-over-quarter increase in net interest income of $2.5 million, as well as with the reduction in our average cost of deposits, which decreased by six basis points quarter over quarter to 1.05%. I'm pleased with the results of our associates' efforts to grow low-cost deposits and reduce rates on higher cost exception price deposits while achieving deposit growth goals. Our expenses declined by 1% linked quarter, reflecting strong expense discipline. Quarter-over-quarter, our adjusted pre-tax, pre-provision income of $263 million increased by 1%. The provision for credit losses increased to $38 million for the third quarter, an increase of $19 million from second quarter. Accordingly, our pre-tax income declined by 7.5% from the second quarter. Third quarter net income of $171 million increased by 14% quarter-over-quarter as we benefited from a linked quarter reduction in income tax expense. The increase in the provision expense reflects in part net charge-offs in the third quarter, which were $22 million or annualized 26 basis point of average loans held for investment. These were largely due to three non-performing loans, two of which are energy loans. Excluding the energy loans, the annualized net charge-off ratio was only six basis point for the third quarter. As of September 30, 2019, our non-performing assets remained low at 31 basis point of total assets. Turning to slide 4. Our bottom line profitability was strong in the third quarter, with a return on assets of 1.58%, return on equity of 14.1%, and a tangible return on equity of 15.7%. Despite macroeconomic and geopolitical volatility, and in a challenging interest rate environment, East West continues to execute. As you can see from the charts on slide 4, our profitability metrics are consistently attractive. The five-quarter range of our reported tangible return on equity has been 14.5%-18.5%, and excluding non-operating items, our operating tangible return on equity has ranged from 15.7%-18.5% for the past five quarters. Turning to slide 5. As of September 30, 2019, total loans reached a record $34 billion and grew $291 million or 3% linked quarter annualized from June 30, 2019. Total loans grew 7% annualized year to date and 9% year-over-year. In the third quarter, average loans of $33.7 billion grew $680 million or 8% linked quarter annualized. In the second quarter, our average loans grew by 7% linked quarter annualized. Our outlook for the remainder of the year expects average loan growth of 8% linked quarter annualized for the fourth quarter. Third quarter 2019 average loan growth was well diversified across all our major commercial and consumer loan portfolios. On an average basis, our commercial real estate loans, including multi-family, construction, and land loans, increased $254 million or 8% annualized, followed by single-family residential mortgage and home equity line, which were up $213 million or 11% annualized. In fact, this was the second best quarter in the history of East West in terms of single family residential mortgage originations. Our average C&I loans increased $200 million or 7% annualized. Average loan yield in the third quarter declined 17 basis point linked quarter to 5.11%, reflecting two Fed funds rate cuts totaling 50 basis points and a decline in LIBOR rates. On slide 6, you can see that total deposit grew to a record $36.7 billion as of September 30, 2019, an increase of $182 million or 2% annualized from June 30. Total deposit grew 5% annualized year to date and 9% year-over-year. In the third quarter, average deposits of $36.5 billion grew $1.2 billion or 13% linked quarter annualized. On an average basis, non-interest bearing demand accounts increased by $475 million or 18% annualized. Interest bearing deposit increased by $697 million or 11% annualized. Growth was well-balanced between money market, non-interest demand, and time deposits, partially offset by a decrease in interest bearing checking accounts. As of September 30, 2019, our end of period loan to deposit ratio was 92.8%, similar to the third quarter average loan to deposit ratio of 92.2%. As we have previously stated, we are comfortable operating with a loan to deposit ratio in the range of 90%-95%. Our average total cost of deposit decreased by six basis points linked quarter to 1.05%, and the average cost of interest bearing deposit decreased by eight basis points to 1.49%. Now I will turn the call over to Irene for a more detailed discussion of our income statement and outlook. Thank you, Dominic. On page seven, we have a slide that shows the summary income statement and a snapshot of notable items during the quarter. Our tax expense this quarter was $35 million, and our effective tax rate was 17%. This compares to an effective tax rate of 16% in the third quarter of last year. Last quarter, recall we incurred $30 million of additional income tax expense for the reversal of certain previously claimed tax credits. Moving on to the discussion of net interest income on page eight. Third quarter net interest income of $370 million increased by 1% linked quarter and grew by 6% year-over-year. Third quarter net interest income growth reflects growth in interest income from average interest bearing cash and deposits with banks. Average deposit growth outpaced loan growth in the third quarter and excess liquidity increased cash and cash equivalents. In addition, interest expense also declined, reflecting a reduction in the average cost of funds, which decreased by six basis points quarter-over-quarter. Combined, these drivers offset the pressure from declining yields on assets. The third quarter GAAP net interest margin was 359, and the adjusted NIM, excluding the impact of ASC 310-30 discount accretion, was 356. The 15 basis points quarter-over-quarter change in our GAAP net interest follows. A 14 basis point decrease from lower loan yields, including fees and discounts. A two basis points decrease from lower yields on other earning assets. A four basis point decrease from the asset mix shift, namely the increase in interest bearing cash and deposits with banks. A one basis point decrease from a funding mix shift. An increase of FHLB advances, all of which were partially offset by a 7 basis point increase in the net interest margin from a lower cost of funds. Our loan portfolio is largely variable rate and the most impactful interest rate indices for our loans are prime rates and the one-month LIBOR. The decline in interest rates this quarter was reflected in our monthly weighted average loan yield, which was 5.08 for the month of September, compared to 5.27 for the month of June. In addition, we have been managing our securities portfolio to maintain an essentially stable yield by replacing maturing cash flow with slightly higher yields at approximately 90 basis points above the six-month Treasury rate and slightly longer durations. Despite the decline in the Fed funds target rate, deposit pricing competition from other banks remains acute. Nevertheless, as Dominic Ng mentioned in his remarks, we have had success in reducing our deposit cost this quarter. As of September 30th, 2019, the end-of-period cost of our deposits was 1.01, down by 10 basis points from 1.11 as of June 30th. The end-of-period cost of our interest-bearing deposits was 1.43 as of September 30th, down by 14 basis points from 1.57 as of June 30th. Importantly, we are lowering deposit costs while simultaneously continuing to grow core deposits. Now turning to slide 9. Total non-interest income in the third quarter was $51.5 million, a 2% decrease from linked quarter. Fee income and net gains on sales of loans totaled $51 million, a 4% increase from $49 million in the second quarter 2019. Net gains on sales of loans increased by $2 million, reflecting the volume of SBA 7 loans sold during the quarter. Wealth management fees increased by $1 million, reflecting ongoing gains and increases in customer volumes. Customer-driven interest rate contract revenue was $11.1 million in the third quarter 2019, compared to $11.8 million in the second quarter. This is a slight quarter-to-quarter decrease in customer-driven revenue, but still significantly above historic run rate, reflecting strong customer demand in the current interest rate environment for this product. Offsetting the revenue is the CVA adjustment, which was a negative $2.7 million in the third quarter, compared to a negative $1.4 million in the second quarter. The quarter-over-quarter change in the CVA reflects the decline of the long-term interest rates during the third quarter. Moving on to slide 10. Third quarter non-interest expense was $177 million, a decrease of 1%. Excluding amortization of tax credit investments and core deposit intangibles, our adjusted non-interest expense was $159 million in the third quarter 2019, a decrease of 1% quarter over quarter. This was largely due to a decrease in compensation and employee benefits. Our efficiency ratio improved modestly quarter over quarter. Our third quarter adjusted efficiency ratio was 37.7%, compared to 38% in the second quarter. Over the past five quarters, our adjusted efficiency ratio has ranged from 37.7%-39.9%. Our third quarter 2019 pre-tax, pre-provision income of $263 million increased 1% quarter over quarter, and our third quarter pre-tax, pre-provision profitability ratio was 2.42 compared to 2.51 from the second quarter. Over the past five quarters, our pre-tax, pre-provision profitability ratio has ranged from 2.42-2.51. In slide 11 of the presentation, we detail out critical asset quality metrics. Our allowance for loan losses totaled $346 million as of September 30, 2019, or 1.02% of loans held for investment, compared to 98 basis points as of June 30, 2019, and 96 basis points as of December 31, 2018. Non-performing assets as of September 30, 2019, were $135 million, or a low 31 basis points of total assets, compared to 28 basis points of total assets as of June 30, and 23 basis points of total assets as December 31, 2018. For the third quarter of 2019, our net charge-offs were $22 million or an annualized 26 basis points of average loans, and we recorded a provision for credit losses of $38 million. This is an increase in net charge-offs of $15 million and an increase in the provision for credit losses of $19 million compared to the second quarter of 2019. Moving on to capital ratios on slide 12. East West capital ratios are strong. Tangible equity per share of $30.22 as of September 30 grew 4% linked quarter and grew by 11% year to date. The tangible equity to tangible asset ratios increased by 57 basis points year to date, and our regulatory capital ratios increased by 41 to 56 basis points. We experienced a higher level of payoffs and pay downs in the third quarter. Based on the year-to-date results, we are lowering our full year end-of-period loan growth outlook to 7% from 10%. For the fourth quarter, we are expecting 7% linked quarter annualized growth based on current pipelines and expectations for the remainder of the year. Quarter to date, fourth quarter has started off strong in terms of loan growth. In our assumptions for the rest of the year, we expect the Fed to cut rates 25 basis points in October. For the full year, we expect our net interest margin, excluding the account of discount accretion, to range between 360 and 365. Our full year outlook implies that the net interest margin for the fourth quarter to be in the range of 340 to 345. Our success in controlling deposit costs has been helping to offset the headwinds to our NIM from our variable rate loan book and the continued flattening of the yield curve. With these revisions, we expect net interest income to grow approximately 6% year-over-year. We are also narrowing our expense growth expectations and expect our non-interest expense, excluding tax credit investment and core deposit intangible amortization, to grow approximately 3% year-over-year, or essentially flat expenses quarter-over-quarter for the fourth quarter. For the full year 2019, we expect the provision for credit losses to be approximately $100 million. Finally, for the full year 2019, we project that our effective tax rate will be approximately 20%, including the impact of the $30 million tax credit reversal from the second quarter. The full-year tax rate assumes tax credit investments of $97 million in 2019. For the fourth quarter, we currently expect that the tax credit amortization will be approximately $45 million. With that, I will now turn the call back to Dominic for closing remarks. Thank you, Irene. I will now open up the call to questions. Operator? Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. In the interest of time, please limit yourself to two questions. Our first question today will come from Ebrahim Poonawala from Bank of America, Merrill Lynch. Please go ahead. Good morning, guys. Good morning, Ebrahim. Just first question on credit. Appreciating that absolute level of charge-offs and NPAs are low, but there's now obviously been a fair amount of concern around trends in your classified assets here to date. I was just wondering if, Irene, you can provide us where classified assets were, special mention substandard loans at the end of September, and if we can particularly talk about just what we are seeing in the C&I book on credit and on the energy front. Do you expect additional hiccups as we move through year-end into next year? Ebrahim, as of the end of the third quarter, total classified loans were $442 million. Special mention loans were $526 million. Got it. Special mention- Special mention dipped down slightly from where we were at $630 to $526 million. Understood. It was my understanding that you guys are just sort of doing a deeper sort of review of the C&I book. I was wondering if there were any takeaways from that. Just again, your thoughts on the energy book as we think about future credit issues. Yeah. We've mentioned on the calls that we continue to actively review our portfolio, all the portfolio, quite frankly, not just C&I and the energy book. So with that, we feel comfortable as far as the grading, the allowance, and where we stand today. Our next question will come from Chris McGratty with KBW. Please go ahead. Hi, good morning. Wondering if you could speak to the updated expense guidance. It seems it's in response to the top-line pressures from the environment on rates. As you're thinking kind of broadly, how should we be thinking about positive operating leverage in this environment? Thanks. Morning, Chris. Yeah, I don't know if it's really kind of in response to the top-line revenue, but certainly, we're practical, and we look at kind of where the revenue growth is coming from and what we need to do. I think, the way I'd characterize it's really more of a narrowing of the guidance. We only have one quarter to go, quite frankly. Okay. Maybe on the loan growth. I think you mentioned pay downs and payoffs kind of affecting this quarter. Could you maybe elaborate on that and maybe whether any of the trade negotiations have had an impact on borrower demand? Thanks. In terms of the third quarter payoff and pay down, actually, we looked at it specifically. It came from a few different sectors. Commercial real estate. In fact, we actually have pretty nice growth, but it's just that right around near the end of the third quarter, the Northern California region have a few large loans that pay down in the third quarter, right around the quarter end. But we expect it in the fourth quarter, commercial real estate will pick up pretty strongly, make up the difference. The other sectors that have seen a higher than expected pay down, one is in entertainment sector. There are a few large loans that just happened that the customer have extra liquidity and wanted to pay off the loans in the third quarter. In addition to that, private equity and also venture capital sector business have actually some high increase in drawdown and then result in a substantial decrease in the balances with pay down right around September. So these are the normal activity that's taking place in these different sectors. There is a little bit more of the volatility of the C&I loans. Our next question will come from Brock Vandervliet with UBS. Please go ahead. Thank you. Good morning. I appreciate the NIM guide and the look into Q4 to kind of square the circle on the full year. Assuming, say, two cuts next year, should we kind of assume the same glide path in NIM next year? Yeah, Brock, we give guidance for the next year with that earnings call that we'll have in January. I'm going to refrain from kind of making any comments for 2020, but certainly with the actual results this quarter and then also our expectation for fourth quarter, you can kind of make your own assumptions around that. Okay. In terms of the credit discussion, the pickup in NPLs this quarter, can you give us any kind of look at the industry concentration of the NPL pickup? Well, we certainly have these energy loans. I think in a mixture of a few different categories, I think we always had maybe a few CRE that been there for a long time, from back even the old days. We know that the collateral value is there, but it just has been stay in the NPA for a long time because it hasn't been resolved. The rest of them are just coming from different sectors. Our next question will come from Matthew Clark with Piper Jaffray. Please go ahead. Hey, good morning. Just wanted to get some more color. It looks like on your securities portfolio, it looks like you're starting to grow that a little quicker here. Should we expect the balance sheet to grow faster than loans from here and into next year to help kind of mitigate the NIM pressure and maintain kind of NII year-over-year? Yeah. I think if you look at the third quarter results, Matt, we did grow, which is very positive. Deposit growth was faster than the loan growth, and so that excess liquidity was placed in our securities book, which is our AFS portfolio, and also the other resale agreements and deposits that we have. That really isn't our strategy. Certainly, if we have excess liquidity and we can make some spread, and increase the NII, we'll certainly do so. But as you also know, that also hurts the NIM. But we're very kind of with the deposits that come from our customers in normal course of business, certainly if there's extra liquidity, we'll redeploy that probably in the securities book if the loan growth isn't there. But with that said, we are also actively managing the deposits and using this opportunity to, when deposit growth happens, core deposit growth, to lay off some of the higher cost deposits. So that will be an active strategy that will continue in the fourth quarter as well and next year. Okay. Then the CDs maturing in the fourth quarter, can you give us the rate at which they are maturing and renewal rates? Yeah. Give me 1 minute. I have 1,000 sheets here, and that is certainly one of them that we have. If you look at the deposits that we have maturing in the fourth quarter, we have approximately $2.7 billion CDs with a weighted average interest rate of 1.96%. And first quarter next year, roughly the same amount as well, same rate, slightly higher at 2.8%. Our next question will come from Jared Shaw with Wells Fargo Securities. Please go ahead. Hi. Good morning. Good morning. I appreciate the color on the loan paydown activity this quarter. Could you give a little update on how the overall loan pipeline is looking as we go into fourth quarter? And should we expect to see that C&I starts to outpace the CRE again in fourth quarter? The loan pipeline so far looks pretty good. I don't know whether C&I would outpace CRE. They both have pretty decent pipeline. But traditionally, we always have a little bit stronger fourth quarter than the other quarters. So we would expect that there are high likelihood that the fourth quarter will have stronger origination results than the other quarters we had during the year. Okay, thanks. Then, it was nice to see in August the large amount of insider purchases of the stock and taking advantage of the price here. With the capital growing and a relatively low dividend payout ratio, I guess, why wouldn't you consider a buyback at the corporate level as well? It seems like that would be a good return and good use of capital from here. I think, one, we feel like putting our own cash up is actually a much stronger indication of our confidence using corporate cash. The other thing is actually, I actually highlighted before, that is that you look at where we are today, even in this quarter, our return of equity and our return of assets are still performing at the top quartile of banks in U.S. So we are generating pretty good return even with these excess capital, so to speak. That's the second reason. The third reason is that, so I'm looking at the overall fundamental in U.S. and our financial performance. So far, so good. However, there are clouds in the future. We're looking at, for example, the Trump administration have just gotten WTO approval of imposing 100% tariff against certain imports coming from Europe. We still have not signed the North American Free Trade Agreement with Canada and Mexico. And we're supposed to, on December 15, to impose tariff on 550 billion of import coming from China. Now, what is the likelihood all of these things is going to be happening to hurt the economy? Probably not. But if you look at what the Fed have done, obviously, they're not cutting interest rate twice to appease our administration. They are doing it because they also worry about the future, despite the fact that the fundamentals are strong today. So from that standpoint, I looked at it as that, while I don't expect that all these bad news will be happening, that things are going to be really bad. But just in case, I'd rather have more capital than all the other banks. But if that doesn't happen, economies are very strong, things are going really well, stock market coming back strong because of all this other stuff that we worry about come 2020 in the presidential election, and things actually got better. Then I need the capital to grow anyway, because we tend to grow a little bit faster than the other banks. It's all the last three reasons combined together. We concluded that at this stage, we're just going to stay put. Our next question will come from Ken Zerbe with Morgan Stanley. Please go ahead. Great, thanks. Actually, just specifically in terms of the loan growth this quarter, I think you mentioned one of the reasons for the Q3 weakness was higher payoffs and private equity and venture capital. Again, towards the end of September, are you seeing any of that come back in October, or is that expected to remain low into fourth quarter? Yeah. In fact, these are just private equity funds. Their activity, it's really hard to predict when they need to draw down, when they need to pay down, because oftentimes it depends on the investment that they make. The PE funds has always been harder to predict, but we continue to bring in more PE clients throughout the year. From that standpoint, I think that we feel pretty good that all in all, if you look at average growth, that we are doing pretty good. It's just that it's hard to predict at one particular moment. Then I think that late September is one of those unusual moments. The fact is, if you look at our average loan growth for the third quarter, it's been pretty good. It's an average of 8%, and then it's pretty across the board in all different loan categories. It's just that, come September 30, we have this pay down. Gotcha. Okay. In terms of expenses, sort of a multi-part question. A, I think I heard you say $45 million of tax credit amortization. Just want to clarify that. But also, B, the 3% X amortization guidance seems to imply a noticeable drop in fourth quarter expenses. Just want to make sure we're thinking about that right and kind of what drives that drop in expenses. Thanks. Yeah. So on the amortization, you are correct. Our current estimate is at the $45 million for fourth quarter. For expenses in total, it doesn't really imply a drop per se from the third quarter levels. But certainly, I think, as I mentioned earlier, we're narrowing it given that we have one quarter in. Our next question will come from Aaron Deer with Sandler O'Neill & Partners. Please go ahead. Good morning, everyone. Following up on the expense question. Just curious, obviously, with this challenging rate environment, you guys are being pretty mindful about expenses. As you look out to next year, are there any technology investments or other initiatives that would keep you from being able to keep a lid on expenses going forward? I think that what we've seen so far is that when you say that technology that can help to reduce expense, is that the question? No, I'm wondering if there's any technology investments or other initiatives, core systems conversions, that sort of thing, that would cause a bigger spend in that arena than we might expect. Oh, I see. Well, actually, one is that we actually were fortunate for the last few years. We have continuously investing in core technology, and we feel pretty good about where we are in terms of a back office infrastructure and then some of these system upgrades from our cash management area, and then a few other areas. And then our BSA system is one of those, I would think that one of the best in the country. However, we will continue to invest. For example, a couple of initiative which is important for us that we will invest, in 2020, one being the foreign exchange system. I think we have an upgrade that we can do that can help to make our foreign exchange capability even stronger so that we can bring in even more sophisticated clients or provide even better service for our clients that require foreign exchange services. The second one is our Hong Kong online banking. This is another one that we feel that it will substantially improve our capability to serve our overseas customers. So these are the two that I think that we will definitely invest, and then we'll continue invest in our digital banking initiatives that we have started about a year and a half ago. So those are the three, but it's nothing unusual. Okay. As my follow-up, going back to the credit, there were three commercial loans highlighted. I think you said two of them were energy. In what industry is the third? Also maybe just with respect to the energy, any additional details you can give in terms of the types of energy loans, whether it's field services or exploration, or kind of what categories those fall into? Yeah. The two energy loans, where we had the increased charge offs related to that, were in E&P. So, they're reserve based lending loans. The other one was in our life sciences kind of category. Our next question will come from Lana Chan with BMO Capital Markets. Please go ahead. Hi there. Just to follow up on credit again, if your loan loss provision guidance of $100 million implies the provision is expected to come down in the fourth quarter. Given the trend that we're seeing on criticized assets, how confident are you with that lower provisioning and, I guess, charge off outlook? Yeah, I think that's a great question, Lana. We've continued, as I mentioned earlier, to scrub our portfolios. I'm comfortable at this point in time that the grades are correct and the allowance is appropriate. Our forecast for fourth quarter factors in some analysis that we've done of what could happen with the migration in the portfolio. So we're comfortable with it at this point in time. Okay. Just to follow up, how big is your energy portfolio right now, and how much of it is on special mention or classified? Our total energy portfolio is $1.2 billion outstanding. The percentage of it that is on watch classified is at 3%. The percentage is 5%. Our next question is a follow-up from Ebrahim Poonawala with Bank of America, Merrill Lynch. Please go ahead. Good morning again. Just as a follow-up on credit, I think there have been a fair amount of questions and concern around your stock on credit. Just taking a step back, Dominic, would love to get your thoughts around are you seeing noticeable signs of credit weakness within the portfolio as you look forward where things stand today? Or do you think this is just quarterly noise given how low credit metrics are and things should remain near current levels absent a bigger deterioration in the economy? Well, I think that with the general economy, I wouldn't say much of a slowdown. It's just more that business sentiments are getting more cautious. So there are maybe a little bit lack of interest of making substantial capital investments, and that do cause a slowdown in the economy to a certain degree. A little bit lack of, let's say, consumer confidence, that also would affect consumer purchase, that affect business overall. We, from a portfolio standpoint, really have not seen much weaknesses. Actually, interesting enough is that everybody have concern of the perception of how tariffs will affect East West Bank. When I looked at these charge-offs so far, we really have not had anything so far this year that have much anything to do with these tariffs. In fact, we have watched this portfolio very carefully. Frankly, for the last couple of years, we have exited over $250 million of C&I loans that we felt that potentially tariff would affect this business, and we send those clients to other banks. From that standpoint, I think so far so good. We actually clearly have the capabilities to manage the challenge in terms of this trade war and somehow navigate it so far so good. If I looked at our portfolio where that we do find that deterioration is in the energy. In fact, it is something that actually well known in that specific industry that all banks that have energy exposure are taking a little bit of loss here and there, and so are we. It's just that the equity market in the energy sector had dried up quite a bit for the last several months, and to that extent, have caused some substantial distress to some of these E&P business. In that standpoint, and that's why what we are doing right now is that, as Irene mentioned, we have this $1.2 billion of energy loans. It's a total of 98 relationships. So it's very easy for us to get to 98 loans, and so far we have 2 that actually resulted in charge-off, and as Irene mentioned earlier, we have 2 more classified. Our energy team and also our credit administration team have reviewed the entire portfolio and appropriately risk-rated these loans and classified them in the appropriate buckets. We will continue to monitor these loans to make sure that we stay vigilant to ensure that we do not have a sort of like keep our eyes off the ball with these energy loans. But other than that, I think as of today, we have not seen anything particular that would cause us to have substantial concern. That is extremely helpful. Just in terms of the energy book, how much of the book is reserve-based versus services versus midstream loans? Yeah. Most of the portfolio is E&P or midstream. About 70% is E&P and 30% is midstream. We have very little in the services. I do not have the exact numbers, Ebrahim, but that was really a legacy from the MetroCorp, some loans from that, but it is very small. Our next question will come from David Chiaverini with Wedbush Securities. Please go ahead. Hi. Thanks. Thanks for squeezing me in here. First on resi mortgage. Originations were strong, but growth slowed owing to pay down. I was curious, do you expect a rebound in resi mortgage growth back to, say, the 20% annualized looking forward? Or is mid-teens growth kind of a new normal? Well, one of the reasons why we have a higher pay down, I would say that we tend to have a higher pay down maybe than I don't know about what normal from other shops, in fact, I haven't looked at that. But the reason we have higher pay down is because East West in the past have traditionally not in favor of making fixed rate long-term mortgage of 15 years fixed or 30 years fixed. We have always been very active in three years, five years, seven years. And the reason we did that is really for our own internal asset liability management. And frankly, six, seven years ago when interest rate were at, I mean Fed funds rate at 25 basis points, we knew one day the rate will start rising. So we intentionally not wanted to have too much exposure in long-term fixed rate. In fact, about maybe two years ago, we also noticed that since rate had risen enough, we feel pretty safe. So we started implementing 15, 30 years fixed rate mortgage. Now when we have customers are so used to with the shorter term, and even if we offer the longer term fixed rate, it took a little while for us internally to sort of promote it, and it took a little while for customers to adapt to it. But what we found is that for the last two or three quarters, we are getting more and more stronger response from our customers in taking on these long-term fixed rate mortgages. Now, with that, I think in time when there are more customers have a longer term fixed rate mortgages, the likelihood of them having to refi because the loan mature is less. I think this will be a gradual process, and I would think that in the next quarter we'll probably still see some high payoff, just like what we have. But then I feel pretty confident the pipeline in the single-family mortgage loan origination there will be strong, and we will continue to get us into a pretty decent sort of growth in terms of in the fourth quarter. Now, probably not going to be in that 20 percentile. We'll see. Thanks for that. My follow-up is on energy. You mentioned about 98 relationships. I am not sure if this is the right way to think about it, but are you able to say what price of oil were your energy loans underwritten at? At what price does oil need to be for the energy book to stabilize from a credit perspective? We do not have that information in front of us right now that we can share with you later on if you need to. After the call, we can follow up on that. I apologize. We do not have it in front of us. Our next question will come from Lana Chan with BMO Capital Markets. Please go ahead. Hi. Sorry, I was just cut off before. Just had another question on energy. What are your reserves against the energy book right now? As of 9/30 on the portfolio, we have about $30 million. Okay. So about a little over 2%. Great. Thanks, Irene. This will conclude our question and answer session. I would like to turn the conference back over to Dominic for any closing remarks. Well, thank you all for joining the call, and I am looking forward to talking to all of you in January 2020. The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.