Q3 2019 Earnings Call
Good day and welcome to the East West Bancorp's third quarter 2019 earnings conference call and webcast all participants will be an eight <unk>.
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I would now like to turn the conference over to drilling and I believe Scott 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 East West Inc. third quarter 2019 with me on this conference call today are dominating our chairman and Chief Executive Officer, and Irene Oh actually 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 at the company within the meaning the safe Harbor provision have to private Securities Litigation Reform Act. Nike 95. These forward looking statements may differ materially from the actual results such a number of risks and uncertainties for more detailed description of risks factors.
Could affect the company's operating results. Please refer to our filings with the Securities Exchange Commission, including our annual report on Form 10-K for the year ended December 31st 2018. In addition, there was another is right on this call pertains to adjusted numbers. Please refer to <unk> third quarter right every installation GAAP to non-GAAP financial measure.
During the course of this call will be referencing slide deck that is available as part of the webcast and on the Investor Relations website. As a reminder, faced causing recorded and will also be available in a replay format. Our investor Relations website I'll now turn the call overseas Dominic.
Thank you Julianna good morning.
Thank you everyone for joining us for third quarter 2019 earnings call I will begin our discussion with a summary of results on slide three.
This morning, we reported third quarter 2019, net income of 171 billion or $1.17 cents per share both by 14% compared to second quarter net income of 150 million and a daughter and three cents per share.
This was achieved record operating revenue of 421 billion.
And record net interest income of 370 million in the third quarter.
In this challenging interest rate environment, we're pleased with a modest quarter over quarter increase in net interest income of 2.5 million as well as what's the reduction in our average cost of deposits, which decreased by six basis points quarter over quarter to 1.5%.
I'm pleased with the results about associate efforts.
To grow low cost deposits.
And reduce rates on higher costs exception price deposits.
While achieving deposit growth goals.
Oh expenses declined by 1% linked quarter.
Flatting strong expense discipline.
Quarter over quarter, just a pretax 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 pretax income declined by 7.5% from the second quarter.
Third quarter net interest that no third quarter net income of 171 million increased by 14% quarter over quarter as we benefited from a linked quarter reduction and income tax expense.
If.
We've seen a provision expense reflects in part net charge offs into third quarters, which were 22 million.
Well annualized 26 basis point of average loans held for investment.
These were largely due to three nonperforming loans two of which are energy logs.
Excluding the energy loans, the annualized net charge off ratio was only six basis points would accrue for the third quarter.
As of September 32019, our nonperforming assets remained low at 31 basis point of total assets.
Turning to slide four.
Our bottom line profitability was strong in the third quarter.
With a return on assets.
One point Fivek present.
Return on equity of 14.1%.
And a tangible return on equity a 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 four.
Our profitability metrics consistently attractive.
[laughter].
The five quarter range five reported tangible return on equity.
He has been 14.5% to 18.5% and excluding non operating items.
Operating tangible return on equity has ranged from 15.7% to 18.5% for the five for the past five quarters.
Turning to slide five as of September 32019.
Total almost reached a record 34 billion.
And Krwtwo hundred 91 million or 3% linked quarter annualized from June 32019.
Total loans grew 7% annualized year to date.
9% year over year.
In the third quarter. After she knows of 33.7 billion grew 680 million <unk>, 8% linked quarter annualized.
The second quarter.
Our average loans grew by 7% linked quarter annualized.
And 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, a commercial real estate loans, including multifamily construction than handles increased 254 millions of 8% annualized followed by a single family residential mortgage and home equity line, which were up 213 million or 11% annualized.
In fact, just wants to second best quarter in the history of East West in terms of single family residential mortgage originations.
Our average see an eye loans increased 200 million a 7% annualized.
Average loan you into 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 six you can see that total deposit grew to a record 36.7 billion as of September 32019.
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 or 36.5 billion grew 1.2 billion.
13% linked quarter annualized.
On an average basis noninterest bearing demand accounts increased by 475 millions or 18% annualized.
And interest bearing deposit increased by 697 million or 11% annualized.
Growth was well balanced between money market noninterest demand and time deposits.
Partially offset by decrease in interest bearing checking accounts.
As of September 32019 out 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% to 95%.
Our average total cost of deposits decreased by six basis point linked quarter to 1.05%.
And the average cost of interest bearing deposit decreased by eight basis point to 1.49%.
No I would turn call over to Irene for more detailed discussion.
Income statement and outlook.
Thank you Dominic.
On page seven we have a slide that shows a 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% and the third quarter of last year.
Last quarter recall, we incurred 30 million of additional income tax expense for the reversal of certain previously claim tax credit.
Moving onto the discussion of net interest income on page eight.
Third fourth quarter net interest income of 370 million increase 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 deposits with me.
Average deposit growth outpaced loan growth and third quarter, an excess liquidity increase cash cash equivalents.
In addition.
Interest expense also declined reflecting a reduction at the average cost of bond, which decreased by six basis points quarter over quarter combine these drivers offset the pressure from declining yields on assets.
The third quarter GAAP net interest margin was reached 59 and the adjusted NIM, excluding the impact.
C Tenthirty discount accretion was three that these ex.
The 15 basis points quarter over quarter change in our GAAP net interest margin breakdown as follows a 14 basis point decrease from lower ammonium including fees and discount.
Two basis point decrease from lower yield on other any assets.
Four basis point decrease from the asset mix shift, namely the increase in interest bearing cash and deposits would be one basis point decrease funding mix shift.
An increase of edge FHLB advances all of which were partially offset by a seven basis point increase and the net interest margin from a lower cost.
Our loan portfolio is largely BAML rate and the most impactful interest rate indices for our loans, our primary and the one month LIBOR. The decline in interest rates. This quarter was reflected in our monthly weighted average loan yield which led by the wait for the month of September compared to 527.
One of the view.
In addition, we had been managing our securities portfolio to maintain especially stable yield by replacing maturing cash flow was slightly higher yield at approximately 90 basis points, Bob the six month treasury rate and slightly longer duration.
Despite the decline in the fed funds private rate deposit pricing competition from other banks remained acute nevertheless, as Dominic mentioned in his remarks, we are the had success in reducing our deposit cost this quarter.
As of September Thirtyth 2019, the end of period cost of our deposit was one no one down by 10 basis points from 111 as of June 30 at the end of period cost of our interest bearing deposit was 143 as of September thirtyth down by 14 basis points from 157.
As of June Thirtyth importantly, we are lowering deposit costs, while simultaneously continuing to grow core deposit.
Now turning to slide nine total noninterest income in third quarter was 51.5 million a 2% decrease linked quarter fee income and net gains on sales of loans totaled 51 million a 4% increased from 49 million in the second quarter 2019 net gains on sales alone increased by two.
Million, reflecting the volume the Espace 70 alone sold during the quarter wealth management fees increased by 1 million.
Reflecting ongoing AIDS 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 that DTA adjustment, which was a negative 2.7 million third quarter compared to a negative 1.4 million in the second quarter to quarter over quarter Kagan CDAV reflects declined in the long term interest rates during the third quarter.
Moving on to Slide 10 third quarter noninterest expense was 177 million a decrease of 1% excluding amortization of tax credit investments and core deposit intangible our adjusted noninterest expense was 159 million in third quarter 2019, a decrease of 1% quarter over quarter. This was lower.
Actually 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% to 39.9%.
Our third quarter 2019 pretax pre provision income of 263 million increased 1% quarter over quarter, and our third quarter pretax pre provision profitability ratio was to 40 230 to 51 from the second quarter.
Over the past five quarters, our pretax pre provision profitability ratio as rates fell to 42 to two there do you want.
In slide 11 of the presentation, we detail out critical asset quality metrics.
Our allowance for loan losses totaled 346 million as of September Thirtyth 2019.
1.02% of loan held for investment compared to 98 basis points as of June Thirtyth 2019, 96 basis points as of December 30, Onest 2000.
Nonperforming assets as of September Thirtyth, 2019 were 135 million or low 31 basis point of total assets compared to 28 basis points and total assets as of June Thirtyth and 23 basis point of total assets at December 31st 2018.
For the third quarter 2019, our net charge offs were 22 million or annualized 26 basis points of average loan and we recorded a provision for credit losses of 38 million. This is an increase in net charge off a 15 million and increasing the provision for credit losses up 19 million some.
Paired to the second quarter 2019.
Moving onto capital ratios on slide 12, East West capital ratios are strong tangible equity per share of $30. A 22 cents as of September Thirtyth grew 4% linked quarter and grew by 11% year to date, the tangible equity to tangible asset ratios increased by 57 days.
This point Youre today, and our regulatory capital ratios increased by 41 to 56 basis points year to date.
East West Board of Directors has declared fourth quarter 2019 dividends for the company's common stock the common stock cash dividend of 27 and a half done is payable on November 15, 2019 to stockholders of record on November one.
2019.
With that I'll move on to updating our 2019 outlook on slide 13, our outlook covers results for the full year 2019 compared to our full year 2018 results.
We experienced a higher level of payoffs and paydowns in the third quarter based on the year to date result, 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 pipeline and expectations for the remember.
Of the year quarter to date fourth quarter has started off strong in terms of them up.
And our assumptions for the rest of the year, we expect that add to cut rates 25 basis point in October for the full year, we expect our net interest margin excluding be a pound of discount accretion to range between Threesixty agreed 65.
Our full year outlook implies that we expect the net interest margin for the fourth quarter two to be in the range of 342 Threeforty by.
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 noninterest 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.
And finally for the full year 2019, we project that our effective tax credit attach rate excuse me will be approximately 20%, including the impact of the 30 million tax credit reversal from second quarter, the full year tax rate assumed tax credit investments.
97 million in 2019 and 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 it two questions operator.
Thank you we will now begin the question and answer session.
Ask your question you May Press Star then one on your Touchtone Tom.
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Our first question today will come from Ebrahim Poonawala from the Bank of America Merrill Lynch. Please go ahead.
Good morning, guys.
Oh, Thank you Graham.
Just first question on credit appreciating that like absolute level of charge offs in npls or no.
Well, obviously being a fair amount of concern around 10 billion classified assets year to date. So I was just wondering if I didn't you can provide us were classified assets were especially mention substandard loans at the end of September and if we can particularly talk about just what you're seeing in the field I book on credit and on the energy.
Do you expect additional hiccups as we move through year end into next year.
Yeah. So Abraham are out of the end of a third quarter total classified loans or 442 million.
Special mentioned loans were 526.
Got it for special mention right.
So special mentioned.
The down slightly from where we were at 632 520.
6 million.
Understood and it was my understanding that you've ever just sort of doing a little deeper photo review of the CLA book I was wondering if the rainy deviate from that and just again, you're told from the energy book as we think about future credit issues.
Yeah, you know we've mentioned on the calls that we continue to actively <unk> review our portfolio all the portfolio quite frankly, not just see an eye and the energy book. So with that you know we feel comfortable as far as you know the grading the allow and where we stand today.
Our next question will come from Chris Mcgratty with KBW. Please go ahead.
Hi, good morning.
I wondered if you could speak to the updated expense guidance seems it's in response to the top line pressures from the environment on rates.
But I do think in kind of broadly how should be thinking about being a positive operating leverage in this environment.
[noise] morning, Kras, Yeah, it's really kind of in response to the topline revenue, but certainly not where practical I. We look at kind of where the revenue growth is coming from and what we need to do I think you know the way I'd characterize it it's really more of a narrowing of the guidance brand and we only have on corn.
On a go quite frankly.
[noise] okay.
And maybe on the loan growth I think you mentioned paydowns and payoffs kind of affecting this quarter.
Could you could you maybe elaborate on that and maybe whether any of the trade negotiations have had an impact on bar demand.
[noise] in sympathy.
Third quarter, you know payoffs and pay down actually.
We looked at it specifically it came from a.
Few different sectors.
Commercial real estate no. In fact is we actually have pretty nice growth, but it just at right around the near the end of the third quarter, Northern California region have a few large loans debt.
A pay down.
In the third quarter right around the quarter end, but I would've expected in the fourth quarter and those commercial real estate would picked up.
Pretty strongly make up the difference and the other sectors that.
Have seen the.
Okay.
Higher than expected pay down one and entertainment.
It's a sector there are.
A few large loans ditches happened that the customer have extra liquidity I wanted to pay off the loans in the third quarter.
And in addition to that our private equity and also venture capital.
Sector business have.
Actually some.
Hi increase in drawdown and then result in a substantial.
The decrease.
And the balances with pay down.
Right around September . So these are the normal activity that's taking place in.
These different sectors hub, there was a little bit more the volatility of the see an idle.
Our next question will come from Brock Vandervliet it with your BS. Please go ahead.
Oh. Thank you good morning, I appreciate the the NIM guide and they are the look into Q4.
To kind of square the circle on the full year, you know assuming say two cuts next year.
It.
Should we kind of assuming the same.
Same glide path and and NIM next year.
Yeah I brought to you know we give guidance for the next year, what's that earnings.
Paul that we'll have in January so I'm going to refrain from kind of making any comments for 2020, but certainly with Oh. The actual results. This quarter and then all our expectation for fourth quarter, you can kind of make your own assumptions around that.
Okay.
And in terms of the credit discussion <unk> the pickup in a in Npls in this quarter was that.
Can you give us any kind of look at.
The industry concentration of the NPL pickup.
Well, we certainly have.
You know these.
Energy loans.
And then.
I think in the mixture also a few different.
Categories I think we always had maybe a few.
CRT that's been there for long time from.
Back even deal days.
And does that we know that the collateral values there, but it's just as being up stay in the NPK fall for long time based because it hasn't been resolved and then the rest of the images coming from a different sectors.
Our next question will come from Matthew Clark with Piper Jaffray. Please go ahead.
Hi, good morning.
Just.
Wanted to get some more color it looks like on your securities portfolio looks like you're starting to grow that I'm, a little quicker here shooting should we expect.
You know the balance sheet to grow faster than loans from here and into next year to help kind of mitigate the NIM pressure and maintain.
And I 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 until that excess liquidity was placed in our securities book, which is our MFS portfolio and then also you know the other.
Reseller agreement and deposits that we have that really isn't our strategy certainly if we have excess liquidity and we can make some spread.
No and increase the Eni, we'll certainly do so but you know as you also know that although him hurts the NIM, but we're very kind of.
Where with the deposit that come from our customers are normal course of business.
Certainly theres extra liquidity, we'll redeploy that probably securities buckets alone isn't there, but with that said, we're also not actively managing the deposit and using this opportunity to when deposit growth happens core deposit growth the laid off some of the higher cost a pocket. So thatll be active strategies that will continue.
The fourth quarter as well and next year.
Okay and then.
The.
The Cds maturing in the fourth quarter can you give us the rate at which they're a maturing and renewal rates.
Yeah give me one men have lost a thousand she chair and that is certainly one of them that we had if you look at the odd to profits that we have maturities and fourth quarter.
We have approximately 2.7 billion CD with a weighted average interest rate of 196.
And of course quarter next year, so the same amount as well same right slightly higher 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 the long Paydown activity. This quarter can you give a little update on how the overall loan pipeline is a is looking as we go into fourth quarter and should we should we expect to see that.
See nice or so pace, the CRT again fourth quarter.
Oh, the loan pipeline, so far looks pretty good and I don't know what does he and I would outpace yahi, they both have pretty decent pipeline.
Traditionally, we always have a little bit stronger fourth quarter.
And the other quarters. So we would expect that there are high likelihood that the fourth quarter.
We'll have stronger.
Origination results than the other quarters, we had during the year.
Okay. Thanks, and then.
It was nice to see in August the at the large amount of insider purchases of the stock and you know taking advantage of the price here you know with a capital growing.
In a relatively low dividend payout ratio.
I guess why wouldn't you consider a buyback for the at the corporate level as well it seems like that would be a good return and good use of capital from here.
Oh, one I think one we feel like that you know.
Putting our own cash Oh up is set up.
Actually.
It's a much stronger indication of our confidence.
With the bank debt using corporate cash or the other thing is actually a I actually I highlighted before that is that you look at what we are today you know even in this quarter Oh, we turn of equity and I'll return of assets are still performing at the.
Oh top quartile of banks.
In U.S. so.
We we are generate pretty could return even with these.
Excess capital so to speak that's the second reason the third reason is that so I'm looking at out the overall found a mental in us and our financial performance. So far so good.
However, there are there Klaus settle into future are we looking at.
Sample.
The Trump administration has just gotten W. Two tw tio approval of imposing 100, 100% tariff against certain Oh imports coming from Europe .
We still have not signed did North America.
Free trade Treaty with Canada and Mexico.
And we're supposed to.
On December 15, two imposed.
Tariff.
On 550 billions.
Of input coming from China now what is the likelihood all of these things can 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 a piece of 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 is that well 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 very well stowmarket coming back strong because of all these other stuff that we worry about how come 2020 in the presidential election, and things actually got better.
Then.
I need to capital to grow anyway, because we tend to grow a little bit faster with any other banks. So is all the sort of like last three recent comp comp combining together we concluded that at this stage Oh, we 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 attaining you mentioned one of the reasons for the three Q weakness was higher pay offs and private equity venture capital are you getting towards the end of September are you seeing any of that come back in October or decide expected to remain low into fourth quarter.
Oh, yes in fact de such as a private equity funds there or do activity is it's really hard to predict or when they need to draw down what when they need to oh pay down because often time it depends on the investment that they make up.
And so.
The the PE funds has always been harder to predict but we continue to.
Bringing more PD.
Clients.
Throughout the years, so from that standpoint, I think that we feel pretty good that up all in all of you look at average growth that we are doing pretty good it's just that.
It's hard to predict that one particular moment and then I think the late September is one of those.
Unusual moment.
The factors if you look at our average loan growth for.
The third quarter, it's been pretty good this I'm an average of.
Okay, 8% and then is pretty cross aboard in.
All different.
Loan categories. So it's just that.
Come September 30, we.
I have to pay down.
Gotcha, Okay, and then in terms of expenses.
Oh, sorry, multipart question, a bit I think I heard you say 45 million tax credit amortization I, just want to clarify that but also be.
The 3% ex 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 inexpensive. Thanks.
Yeah. So on the amortization you are correct. Our current estimate is that the 45 million for fourth quarter for expenses and hold all it doesn't really apply a drop per se from the third quarter levels, but certainly I think as I mentioned earlier were narrowing and given that.
We have on quarter end.
Our next question will come from Aaron Deer, with Sandler O'neill and partners. Please go ahead.
Good morning, everyone.
Following up on the an expense question just curious it obviously with this challenge and written Berman you guys have been pretty mindful about expenses as you look out to next year as there are there any technology investments or other initiatives that would keep you from being able to too.
Keep a lid on expenses going forward.
Hmm I.
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.
A bigger spend in that Arena. Then you know then 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 what we are in terms of a back office infrastructure and then some of these system upgrades from.
Our cash management area and then as a few other areas and then B S. A system is one of those.
The thing that one of the best.
In the country so.
However, we will continue to invest for example.
A couple of initiated which is important for us that we will invest.
In 2021 being the.
Foreign exchange system I think we have an upgrade that we can do that can help to make our foreign exchange exchange capability, even stronger so that we can bring in even more sophisticated clients I'll provide even better service for our clients that we acquired foreign exchange services. The second one is our Hong Kong.
Online banking.
We 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 does and then we'll continue invest in our digital banking initiatives that we have started about a year in half ago.
So those are this way, but I mean, it's nothing unusual.
Okay.
Then as my follow up it going back to the to the credit.
There were three commercial loans highlighted.
It is I think you said two of them more energy and what industry is the third and then also maybe just with respect to the energy and additional details you can give in terms of the the types of energy loans, whether its field services or exploration or kind of what categories those falling to.
Yes, so on the two energy loans, where we had that increase or kind of charge offs related to that we're in ERP. So there.
Reserve based lending alone 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 I'm just a follow up on credit again, and if youre loan loss provision guidance of 100 million implies the provision is expected to come down into fourth quarter I mean, given the trends that we're seeing on criticized assets.
How confident are you a withstand lower provisioning and I guess charge I thought luck.
Yeah, I think that's a great question line I mean, I think with the yeah. So with you know where we've continued as I mentioned earlier to scrub our portfolio's uncomfortable at this point in time that the grades are craft and the allowances appropriate our forecast for fourth quarter factors Dan salmon.
Now says that we've done or what could happen with the migration.
In the portfolio. So we're comfortable with that at this point in time.
Okay, and just a follow up how big is your energy portfolio right now and how much of it is I'm on special mentioned loans classified.
Our total energy portfolio.
As 1.2 billion outstanding.
The percentage of that that is a and watch.
I find it has three first at the port.
So much is 5%.
Our next question as a follow up from Ebrahim Poonawala with Bank of America Merrill Lynch. Please go ahead.
Oh, good morning again.
Just had a follow up on credit then I think I mean, a fair amount of questions Im concerned around your stock on credit.
Just taking a step back Dominic would love to get your thoughts around are you seeing a noticeable signs of credits weakness within the portfolio. As you look forward facing stand today or do you think this is just quarterly noise given our low credit metrics are and things are coming near current levels absent a bigger deterioration in the economy.
Well I think that with the general economy.
I wouldn't say a much of a slowdown is just more of that business sentiment.
Getting more cautious so there maybe a little bit lack of.
Interest of making substantial capital investments and that do caused a slowdown in the economy to a certain degree in Alaska I'm, a little bit lack of let's say consumer confidence at all so.
I would affect.
You know consumer purchase that affect business overall, we've from our portfolio standpoint, where do you have not seen much.
Weakness I mean actually is interesting enough is that everybody have concern.
Of the perception of how terrorists.
That east West Bank, and when I looked at east charge offs. So far you know that we really have not had anything.
So far this year.
Got it much of anything to do with these tests in fact, we have watched us portfolio very carefully frankly.
For the last couple of years web exited.
Over $250 million of see an eye loans that we felt that potentially cabot would affect his business and we send those clients to other banks.
So.
From that standpoint, I think so far so far so good we actually have clearly have to capabilities to manage.
The.
The challenge in terms of days.
Trade war and somehow navigated so far so good.
If I looked at our portfolio, where that we do find that deterioration is in the energy.
And in fact, it is something that actually Oh, well known in that specific industry that up all banks that have.
Hey.
I have energy exposure.
Taking a little bit of also here there and so all we and it's just at the equity market.
In the engine energy sector had dried up.
Quite a bit.
And for the last several months and to that extent have caused some.
Substantial distress to some of these.
Empty.
Business, so in that standpoint, and so that's why we we as much as.
What we're doing right now is that.
As Irene mentioned, we have this $1.2 billion of energy loans is a total of 98 relationship. So it's very easy for us to get to 98 loans and so far we have to that actually resulted in charge off and as I read mentioned earlier, we have two more cost.
Side and we are.
Our.
As you team.
And also.
Credit administration team.
Have we view the entire portfolio had appropriately risk rated debt.
These loans and classify them into people appropriate buckets, and we will continue to monitor these loans to make sure that we stay vigilant.
To ensure that we do not have sort of like keep our eyes off the ball with with these energy loans, but other than that I think as of today, we have not seen anything.
Particular that will cause us to have substantial concern.
That was extremely helpful and just seem to move the energy book, how much of the book is.
They have to assist services with as much simo loans.
Yeah, we are those in the portfolio as a NPR midstream about 70% of DMP and 30% is midstream we have very little on the surface says yeah. I don't have the exact numbers Abraham but that was really a legacy from the metro.
Some some loans from that but it's very small.
Our next question will come from David sharing with Wedbush Securities. Please go ahead.
Hi, Thanks, [laughter]. Thanks for squeezing me in here. So first on a resi mortgage so originations were strong growth slowdown owing to pay down. So I was curious do you expect a rebound in resi mortgage growth back to say that the twentys person annualize looking forward or is.
Mid teens growth kind of a new normal.
Well one of the reasons why we have.
Hi, a pay down I would say that we tend to have a higher pay down maybe Dan I don't know I mean, I don't know about what normal some other shops in fact I haven't looked at that but the reason we have high pay downs because east west in the past have traditionally.
Not in favor of making a fixed rate long term mortgage of 15, you effects of 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 rates at I mean fed fund rate at 25 basis point, we knew one day rate will start rising. So we intentionally not wanted to have too much exposure in long term fixed rate.
And so in fact about.
The two years ago, we also noticed that since rate have risen enough.
We feel pretty safe so we started.
Implementing.
15, 30 years fixed rate mortgage.
No. When we have customers are so used to would be shorter term and even if we offer the longer term fixed rate. It took a little while for the for us internally to sort of like UBS.
Promoted and it took a little while for customers to adapt to it but what we found is to add for the last two.
Three quarters, we're 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 they are more customers have a longer term fixed rate mortgages, the likelihood of them having to re fi because.
The Loma tool, it's less so I think this will be a gradual process and I would think the in the next quarter, we probably still see.
Some high pay off just like what we have but then I feel pretty confident the pipeline ended single family mortgage loan origination there will be strong and we will continue to get us into a a pretty decent.
So like growth.
In terms of.
In the fourth quarter now.
Probably not going to be in that 20%, we'll see.
Thanks for that and my follow up is on energy you mentioned about.
98 relationships and I'm not sure if that's the right way to think about it but are you. It lets say you know what price of oil.
Where are your energy loans underwritten at and at what price does oil need to be for the energy book to stabilize from a credit perspective.
We don't have that information in front of US right now that we can share with you at a later on if you need to.
After the call we can I'll follow up on that when you I apologize, we don't happen in Panama.
Our next question will come from Lana Chan with BMO capital markets. Please go ahead.
Hi, sorry, I was just cut off before it I'm just kind of another question on energy.
Reserves against the energy book right now.
I I love a 930 on that portfolio, we have about 30 million.
Okay, so about a little over 2%.
Thanks, I mean.
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'm looking forward to.
Talking to all of you.
In January 2020.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.