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East West Bancorp Inc (EWBC 0.01%)
Q3Â 2019 Earnings Call
Oct 17, 2019, 11:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to the East West Bancorp's Third Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions] 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.
Julianna Balicka -- Director of Strategy and Corporate Development
Thank you, Shawn. 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 31st, 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.
Dominic Ng -- Chairman, President & Chief Executive Officer
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 the summary of results on Slide 3. This morning, we reported 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 both the reduction in our average cost of deposits, which decreased by 6 basis point quarter over quarter to 1.05%. I'm pleased with the results of our associate's 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 interest -- 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 6 basis points for the quarter -- for the third quarter. As of September 30, 2019, our non-performing assets remained low at 31 basis points of total assets.
Turning to Slide 4, our bottom line profitability was strong in the third quarter with the 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% to 18.5%. And excluding non-operating items, our operating tangible return on equity has ranged from 15.7% to 18.5% for the five -- for the past five quarters.
Turning to Slide 5; as of September 30, 2019, total loans reached a record $34 billion and include $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, the 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, 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, our commercial real estate loans, including multifamily, 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 points linked-quarter to 5.11%, reflecting two fed funds rate cuts totaling 50 basis points and the 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 and interest-bearing deposits 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% to 95%. Our average total cost of deposits decreased by 6 basis point linked-quarter to 1.05% and the average cost of interest bearing deposits decreased by 8 basis points to 1.49%.
And now I will turn the call over to Irene for a more detailed discussion of our income statement and outlook.
Irene H. Oh -- Executive President & Chief Financial Officer
Thank you, Dominic. On Page 7, 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 8; 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 6 basis points quarter-over-quarter. Combined, these drivers offset the pressure from declining yields on assets. The third quarter GAAP net interest margin was 3.59% and the adjusted NIM, excluding the impact of ASC 310-30 discount accretion was 3.56%. The 15 basis points quarter-over-quarter change in our GAAP net interest margin breaks down as follows: a 14 basis point decrease from lower loan yields including fees and discounts; a 2 basis points decrease from lower yields on other earning assets; a 4 basis point decrease from the asset mix shift, namely the increase in interest-bearing cash and deposits with banks; and 1 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 primary 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 mentioned in his remarks, we have had success in reducing our deposit costs 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 30. 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 linked-quarter. Fee income and net gains on sales of loans totaled $51 million, a 4% increase from $49 million in the second quarter of 2019. Net gains on sales of loans increased by $2 million reflecting the volume of SBA 7A 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 of 2019 compared to $11.8 million in the second quarter. This is a slight quarter to quarter decrease in customer-driven revenues, but still significantly above historical 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 a decline in 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 a $159 million in the third quarter of 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% to 39.9%. Our third quarter 2019 pertax 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% to 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 30th, 2019 or 1.02% of loans held for investment compared to 98 basis points as of June 30th, 2019 and 96 basis points as of December 31st, 2018. Non-performing assets as of September 30th, 2019 were $135 million or a low 31 basis points of total assets compared to 28 basis points of total assets as of June 30th and 23 basis points of total assets at December 31st, 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's capital ratios are strong. Tangible equity per share of $30.22 as of September 30th 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 basis points 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 $0.275 is payable on November 15th, 2019 to stockholders of record on November 1st, 2019.
And 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 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 3.60% and 3.65%. Our full year outlook implies that we expect the net interest margin for the fourth quarter to be in the range of 3.40% to 3.45%.
Our success in controlling deposit cost 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 the 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. And finally, for the full year 2019, we project that our effective tax rate, excuse me, 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. 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.
Dominic Ng -- Chairman, President & Chief Executive Officer
Thank you, Irene. I would now open up the call to questions. Operator?
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question today will come from Ebrahim Poonawala from the Bank of America Merrill Lynch. Please go ahead.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Good morning, guys.
Irene H. Oh -- Executive President & Chief Financial Officer
Good morning, Ebrahim.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Just first question on credit, appreciating that like absolute level of charge-offs in NPAs are low, but there has obviously been a fair amount of concern around trends in your classified assets year-to-date. So 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?
Irene H. Oh -- Executive President & Chief Financial Officer
So, Ebrahim, as of the end of the third quarter, total classified loans were $442 million, Special Mention loans were $526 million.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Got it. So Special Mention, went...
Irene H. Oh -- Executive President & Chief Financial Officer
So, Special Mention dipped down slightly from where we were at $630 million to $526 million.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Understood. And 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. And just, again, your thoughts on the energy book as we think about future credit issues.
Irene H. Oh -- Executive President & Chief Financial Officer
Yeah. We've mentioned on the call 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.
Operator
Our next question will come from Chris McGratty with KBW. Please go ahead.
Christopher McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Good morning. Wondering, 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 as you're thinking kind of broadly, how should we be thinking about positive operating leverage in this environment? Thanks.
Irene H. Oh -- Executive President & Chief Financial Officer
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, it's really more of a narrowing of the guidance from -- and we only have one quarter to go, quite frankly.
Christopher McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Okay. And 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.
Dominic Ng -- Chairman, President & Chief Executive Officer
In terms of the third quarter, payoff and pay down actually, we looked at it specifically, it came from a few different factors. Commercial real estate, in fact -- we actually have pretty nice growth, but just at right around the -- near end of the third quarter, Norther California region have a few large loans that got paid down in the third quarter, right around the quarter end.
But I -- we expected in the fourth quarter you know commercial real estate would pick up pretty strongly, make up the difference. And the other sectors that have seen the -- a higher than expected pay down; one is in entertainment sector. There were a few large loans that just happened that the customer have extra liquidity and 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 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 was a little bit more the volatility of the C&I loans.
Operator
Our next question will come from Brock Vandervliet with UBS. Please go ahead.
Brock Vandervliet -- UBS -- Analyst
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?
Irene H. Oh -- Executive President & Chief Financial Officer
Yeah, Brock, we give guidance for the next year with that earnings call that we will have in January. So 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 the fourth quarter, you can kind of make your own assumptions around that.
Brock Vandervliet -- UBS -- Analyst
Okay. And in terms of the credit discussion, the pick-up in NPLs this quarter, was that -- can you give us any kind of look at the industry concentration of the NPL pick-up?
Dominic Ng -- Chairman, President & Chief Executive Officer
Well, we certainly have these energy loans and then I think in the mixture of a few different categories. I think we always had maybe a few CRE that's been there for a long time, from back even the old days and as that we know that the collateral value is there, but it's just has been stay in the NPA for a long time because it hasn't been resolved, and then the rest of them are just coming from different sectors.
Operator
Our next question will come from Matthew Clark with Piper Jaffray. Please go ahead.
Matthew Clark -- Piper Jaffray -- Analyst
Hey, good morning. Just wanted to get some more color, 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?
Irene H. Oh -- Executive President & Chief Financial Officer
Yeah. I think, if you look at the third quarter results that 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 then also the other resale agreements and deposits that we have.
That really is in our strategy. Certainly, if we have excess liquidity and we can make some spread, and increase that NII, we'll certainly do so. But as you also know that also hurts the NIM. But we were very kind of -- where with the deposits that come from our customers in normal course of business, certainly if there is extra liquidity, we'll redeploy that probably in the securities book if the loan growth isn't there.
But with that said, we're 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 active strategy that we'll continue in the fourth quarter as well and next year.
Matthew Clark -- Piper Jaffray -- Analyst
Okay. And then the -- with the CDs maturing in the fourth quarter, can you give us the rate at which they are maturing and renewal rates?
Irene H. Oh -- Executive President & Chief Financial Officer
Yeah, give me one minute. I have brought a thousand 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 the weighted average interest rate of 1.96%. And first quarter next year, roughly the same amount as well as same rates; slightly higher at 2.8%.
Operator
Our next question will come from Jared Shaw with Wells Fargo Securities. Please go ahead.
Jared Shaw -- Wells Fargo Securities -- Analyst
Hi, good morning.
Dominic Ng -- Chairman, President & Chief Executive Officer
Good morning.
Jared Shaw -- Wells Fargo Securities -- Analyst
Appreciate the color on the loan pay-down 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?
Dominic Ng -- Chairman, President & Chief Executive Officer
The loan pipeline so far looks pretty good, and 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.
Jared Shaw -- Wells Fargo Securities -- Analyst
Okay, thanks. And then, it was nice to see in August, the large amount of insider purchases of the stock and you know taking advantage of the price here with the capital growing and the 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.
Dominic Ng -- Chairman, President & Chief Executive Officer
One -- I think one, we feel like that, you know putting our own cash up is actually is a much stronger indication of our confidence with the bank than 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 on equity and our return on assets are still performing at the top quartile of banks in US. 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 US and our financial performance, so far so good. However, there are [Indecipherable] sort of 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 America Free Trade treaty with Canada and Mexico, and we're supposed to, on December 15, to impose tariff on $550 billions of import coming from China.
Now, what is the likelihood all of these things is going to be happening that will 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 is 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 very well, stock market coming back strong, because of all these other stuff that we worry about, how -- come 2020 and 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 than the other banks. So it's all the --sort of like, last three reason combining together, we concluded that at this stage, we're just going to stay put.
Operator
Our next question will come from Ken Zerbe with Morgan Stanley. Please go ahead.
Ken Zerbe -- Morgan Stanley -- Analyst
Great, thanks. Actually just specifically in terms of loan growth this quarter, I think you mentioned one of the reasons for the 3Q weakness was higher payoffs in private equity and venture capital. Are you -- I guess, toward the end of September, are you seeing any of that come back in October or is that expected to remain low in the fourth quarter?
Dominic Ng -- Chairman, President & Chief Executive Officer
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 often time, it depends on the investment that they make. And so the PE funds has always been harder to predict, but we continue to bring in more PE clients throughout the year.
So, 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 just that, it's hard to predict that one particular moment, and then I think the late September is one of those unusual moments. The fact is, if you look at our average loan growth for the third quarter, it has been pretty good, I mean an average of 8% [Phonetic] and then it's pretty across the board in all different loan categories. So, it's just that come September 30, we have this pay down.
Ken Zerbe -- Morgan Stanley -- Analyst
Got you, OK. And then, in terms of expenses, sorry, it is 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% 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 in expenses? Thanks.
Irene H. Oh -- Executive President & Chief Financial Officer
Yeah. So on the amortization, you are correct. Our current estimate is that will be $45 million for fourth quarter. For expenses in total, it doesn't really imply a drop per se from the third quarter level. But certainly, I think, as I mentioned earlier, we're narrowing it, given that we have one quarter end.
Operator
Our next question will come from Aaron Deer with Sandler O'Neill & Partners. Please go ahead.
Aaron Deer -- Sandler O'Neill & Partners -- Analyst
Good morning, everyone. Following up on the expense question, just curious, obviously with this challenging rate environment, you guys have been pretty mindful about expenses. As you look out to next year, is there -- are there any technology investments or other initiatives that would keep you from being able to keep a lid on expenses going forward?
Dominic Ng -- Chairman, President & Chief Executive Officer
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?
Aaron Deer -- Sandler O'Neill & Partners -- Analyst
No, I'm wondering if there is 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?
Dominic Ng -- Chairman, President & Chief Executive Officer
Oh I see. Well, actually, one is that, we actually were fortunate. For the last few years, we have continuously investing in our core technology and we feel pretty good about where we are in terms of the 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. So -- 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 half ago. So those are the three, but I mean, it's nothing unusual.
Aaron Deer -- Sandler O'Neill & Partners -- Analyst
Okay. And then as my follow-up, going back to the credit, there were three commercial loans highlighted and I think you said two of them were energy. In what industry is the third? And then 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?
Irene H. Oh -- Executive President & Chief Financial Officer
Yeah, so the two energy loans where we had the increased kind of charge-offs related to that were in E&P. So there are reserve base lending loans. The other one was in our Life Sciences kind of category.
Operator
Our next question will come from Lana Chan with BMO Capital Markets. Please go ahead.
Lana Chan -- BMO Capital Markets -- Analyst
Hi, there. Just a follow-up on credit again, and if your loan loss provision guidance of $100 million implies the provision expected to come down in the fourth quarter. I mean given the trends that we're seeing on the criticized assets, how confident are you with that lower provisioning, and I guess charge-off outlook?
Irene H. Oh -- Executive President & Chief Financial Officer
Yeah, I think that's a great question, Lana. I mean, I think with the -- so with -- 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 are appropriate. Our forecast for fourth quarter factors in some analysis that we've done on what could happen with the migration in the portfolio. So we're comfortable with that at this point in time.
Lana Chan -- BMO Capital Markets -- Analyst
Okay. And just a follow-up, how big is your energy portfolio right now, and how much of it is on Special Mention or classified?
Irene H. Oh -- Executive President & Chief Financial Officer
Our total energy portfolio is $1.2 billion, outstanding. The percentage of that is on watch, classified is 3%, the [Technical issue] is 5%.
Operator
Our next question is a follow-up from Ebrahim Poonawala with Bank of America Merrill Lynch. Please go ahead.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Good morning, again. Just had a follow-up on credit and 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.
Dominic Ng -- Chairman, President & Chief Executive Officer
Well, I think that with the January 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, and the lack of -- a little bit lack of, let's say, consumer confidence and also would affect consumer confidence and also would affect consumer purchase, it affect business overall. We, from our portfolio of standpoint, really have not seen much weakness.
I mean actually its interesting enough is that everybody have concern of the perception of how tariffs will affect East West Bank. And when I looked at these, charge-offs so far that we really have not had anything so far this year that I mentioned have 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 will affect these business and we send those clients to other banks.
So from that standpoint, I think so far so good. We actually have -- clearly have the capabilities to manage the challenge in terms of this 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 well known in that specific industry that all banks that have a -- have energy exposure, are taking a little bit of loss here and there, and so, are we. And it's just at the equity market and the 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 E&P business.
So in that standpoint and that's why we as much as, what we are doing right now is that, as Irene mentioned, we have this $1.2 billion of energy loans, is a total of 98 relationships. So it's very easy for us to get two 98 loans and so far we have two that actually resulted in charge-offs. And as Irene mentioned earlier, we have two more classified.
And we are -- our energy team and also our credit administration team have reviewed the entire portfolio and appropriately risk rated these loans and classified them in appropriate buckets. And 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 will cause us to have substantial concern.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
That was extremely helpful. And just in term of the energy book, how much of the book is reserve based versus services versus midstream loans?
Irene H. Oh -- Executive President & Chief Financial Officer
Yeah, we -- most of the portfolio is E&P or midstream, about 70% is E&P and 30% into midstream. We are very little into services. I don't have the exact numbers, Ebrahim, but that was really a legacy from the Metro, some loans from that, but it's very small.
Operator
Our next question will come from David Chiaverini with Wedbush Securities. Please go ahead.
David Chiaverini -- Wedbush Securities -- Analyst
Hi, thanks. Thanks for squeezing me in here. So first on resi mortgage, so originations were strong, but growth slowed owing to pay down. So, I was curious, do you expect a rebound in resi mortgage growth back to say the 20%s annualized looking forward or is mid-teens growth kind of the new normal?
Dominic Ng -- Chairman, President & Chief Executive Officer
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 then. I don't know, I mean, 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 downs because, East West in the past have traditionally not in favor of making fixed rate long-term mortgage of 15 years fixed 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 were at -- I mean Fed fund 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. And so, in fact about 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.
Now, when we have customers are so used to with the shorter term and even if we'll offer the longer-term fixed rate, it took a little while for us internally to sort of like 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 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. So I think this will be a gradual process, and I would think that in the next quarter we probably still see some high pay off just like what we have.
But then, I feel pretty confident that 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 like growth in terms of -- in the fourth quarter. Now, probably not going to be in that 20 percentile, we'll see.
David Chiaverini -- Wedbush Securities -- Analyst
Thanks for that. And my follow-up is on energy. You mentioned about 98 relationships and I'm not sure if this is the right way to think about it, but are you able to say what price of oil where your energy loans underwritten at, and at what price does oil need to be for the energy book to stabilize from a credit perspective?
Dominic Ng -- Chairman, President & Chief Executive Officer
We don't have that information in front of us right now. We can share with you at -- later on if you need to.
Irene H. Oh -- Executive President & Chief Financial Officer
After the call, we can follow-up on that. I apologize, we don't have it in front of us.
Operator
Our next question will come from Lana Chan with BMO Capital Markets. Please go ahead.
Lana Chan -- BMO Capital Markets -- Analyst
Hi, sorry, I was just cut off before. Just had another question on energy, what are your reserves against the energy book right now?
Irene H. Oh -- Executive President & Chief Financial Officer
As of 9/30 on the portfolio, we have about $30 million.
Lana Chan -- BMO Capital Markets -- Analyst
Okay.
Irene H. Oh -- Executive President & Chief Financial Officer
It's about a little over 2%.
Lana Chan -- BMO Capital Markets -- Analyst
Great. Thanks, Irene.
Operator
This will conclude our question and answer session. I would like to turn the conference back over to Dominic for any closing remarks.
Dominic Ng -- Chairman, President & Chief Executive Officer
Well, thank you all for joining the call and I'm looking forward to talking to all of you in January 2020.
Operator
[Operator Closing Remarks]
Duration: 50 minutes
Call participants:
Julianna Balicka -- Director of Strategy and Corporate Development
Dominic Ng -- Chairman, President & Chief Executive Officer
Irene H. Oh -- Executive President & Chief Financial Officer
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Christopher McGratty -- Keefe, Bruyette, & Woods, Inc. -- Analyst
Brock Vandervliet -- UBS -- Analyst
Matthew Clark -- Piper Jaffray -- Analyst
Jared Shaw -- Wells Fargo Securities -- Analyst
Ken Zerbe -- Morgan Stanley -- Analyst
Aaron Deer -- Sandler O'Neill & Partners -- Analyst
Lana Chan -- BMO Capital Markets -- Analyst
David Chiaverini -- Wedbush Securities -- Analyst
