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East West Bancorp Inc (EWBC 1.50%)
Q4Â 2019 Earnings Call
Jan 23, 2020, 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 Fourth Quarter and Full Year 2019 Earnings Call.
[Operator Instructions]
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, Sarah.
Good morning and thank you everyone, for joining us to review the financial results of East West Bancorp for the full year and the fourth 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 more detailed description of the 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 full year and fourth quarter earnings release for the reconciliation of GAAP to non-GAAP financial measures. During the course of this call, we will be referencing a slide deck that is available as part of the webcast 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 -- East West Bancorp, Inc.
Thank you, Julianna.
Good morning and thank you everyone, for joining us for our full year and fourth quarter 2019 earnings call. I will begin our discussion with a summary of results on Slide 3. This morning, we reported full -year 2019 net income of $674 million or $4.61 per share, down by 4% compared to full-year 2018 net income of $704 million or $4.81 per share. Now excluding non-operating income -- I'm sorry, excluding non-operating items, we reported full-year 2019 adjusted net income of $708 million or $4.84 per share, an increase of 4% compared to full-year 2018 adjusted net income of $682 million or $4.66 per share.
Fourth quarter 2019 net income was $188 million or $1.29 per share, up by 10% compared to the third quarter net income of $171 million or $1.17 per share, and also up by 9% compared to the fourth quarter of 2018 net income of $173 million or $1.18 per share. Fourth quarter 2019 adjusted net income was $187 million or $1.28 per share, up by 9% quarter-over-quarter, and up by 8% year-over-year.
In 2019, East West achieved record full-year revenue of $1.7 billion which grew by 5% year-over-year, and record net interest income of $1.5 billion, which grew by 6% year-over-year. We ended the year with record loans of $34.8 billion, an increase of 7% from last year and record deposits of $37.3 billion, an increase of 5% from 2018. 2019 also end a transformational decade for East West, during which we moved -- we more than doubled our asset size to $44.2 billion and grew both our commercial loans and our non-interest bearing deposits nearly fivefold. Over the past 10 years, we achieved substantial growth and diversification in loans, deposits and revenue, strengthening the resilience of our balance sheet, earnings and profitability.
Our diluted earnings per share also grew by 458% in the decade. Our growth and profitability reflect the strength of our diverse business model, which is the foundation for continued solid financial performance for years to come. In 2019, we earned a return on assets of 1.59%, return on equity of 14.2% and the return on tangible equity of 15.9%. This is the fifth consecutive year of a return on tangible equity above 15%.
On Slide 4, you can see the five-quarter trend and our ratios. Our profitability was once again strong in the fourth quarter. Fourth quarter 2019 return on asset was 1.68%, return on equity was 15%, and the return on tangible equity was 16.7%.
Moving to Slide 5, our loan portfolio is well balanced between commercial, commercial real estate and residential mortgage loans. Over the past 10 years, we steadily made investments in people and our infrastructure building specialized commercial lending verticals, expanding our cross-border capabilities, and broadening our lending solutions. This has resulted in a diversified platform capable of generating above industry organic loan growth year in, year out. As of December 31, 2019, total loans reached a record $34.8 billion, an increase of $2.4 billion or 7%, as I mentioned earlier. Full-year 2019 average loans of $33.4 billion, grew $3.1 billion or 10% over last year.
By portfolio, residential mortgage grew 15% year-over-year. Commercial real estate and C&I both grew by 9%. In dollar terms, loan growth was evenly distributed across the three sectors, which all grew just over $1 billion each. For the fourth quarter of 2019, average loans of $34.4 billion, grew by 9% linked quarter annualized. We saw very strong growth from commercial real estate, which increased by $505 million or 15% linked quarter annualized, followed by residential mortgage, which increased by $247 million or 12% linked quarter annualized.
In fact, the fourth quarter of 2019 was the best quarter in the history of East West in terms of single-family residential mortgage originations. Average commercial loans grew by $34 million or 1% -- quarter annualized. And with that, I will move on to review our 2020 outlook. Apologize for that. Let me go back to my script in order.
The average loan growth of 10% in 2019 was achieved in a challenging environment, including three interest rate cut by the Federal Reserve of slowing economy and an ongoing US-China trade tension that started to escalate in 2018 and remained high throughout the past year. At East West, the headwinds from the US-China trade tension are most easily visible in our wholesale trade portfolio, which typically shows seasonally strong growth in the fourth quarter. Instead last year, we saw a decrease in commitment of 7% and a decrease in loan outstanding of 12% year-over-year.
As of December -- 2019, we had commitments of $2.35 billions, and loans outstanding of $1.4 billion in our wholesale trade portfolio. However, what is less visible is the focus and active management of our commercial loan portfolio throughout 2018 and 2019. Over the course of the past two years, where we could, we actively reduced credit exposures, particularly to customers with higher direct or indirect tariff-related credit risks, largely concentrated in the wholesale trade and manufacturing.
Importantly, we have experienced only one charge-off related trade tariffs and it was less than $1 million. East West is starting the new decade with confidence knowing that our portfolio is better position and stronger today, and we are ready to support our customers as geopolitical backdrop improves. With the signing of the partial trade agreement on January 15, we believe that there is more clarity surrounding the US-China trade dispute. In addition, our customers have adapted to the new normal of US-China relations in terms of the operations and cost over the past two years. Reduced tariffs uncertainty and geopolitical volatility should only allow them to resume growth.This clarity should have a positive impact for East West in particular for our ability to grow our cross-border loans and expand our cross-border customer relationships. The value of the expertise that our cross-border bankers bring to the table has only increased. We've seen renewed interest from Chinese firms exploring direct foreign investments, or evaluating expansion opportunities in the United States in the manufacturing, energy or service sectors. Furthermore, the expected increase in purchase of US manufactured goods by China provides cross-border trade expansion opportunity for our customers. Also now more than ever, the need for US-based business to develop a China strategy and understand the Chinese market dynamics is vital.
East West is well positioned to take advantage of the evolving nature of the US-China cross-border business and we are confident about our ability to expand both our commercial and consumer market share in this sector in 2020 and future years.
For the full-year 2020, our current outlook for the end of period loans is growth of 7% to 8%. We expect that the growth in 2020 will come from across all of our major loan portfolios of commercial real estate, residential mortgage and C&I.
Now moving on to Slide 6 for a discussion of deposits. As of December 31, 2019, our end of period loan to deposit ratio was 93.2%. As we have previously stated, we are comfortable operating with a loan to deposit ratio in the range of 90% to 95%. Total deposit grew to a record $37.3 billion as of December 31, 2019, an increase of $1.9 billion or 5% year-over-year. Full-year 2019 average deposit of $36 billion, grew $2.8 billion or 8% from 2019. Average deposit growth for the 2019 full year primarily came from growth and deposits, and interest-bearing checking partially offset by a decrease in non-interest bearing demand accounts that happened in the first quarter of last year.
In fact, after declining in the first quarter due to a shift to interest-bearing checking for certain customer balances, our non-interest bearing demand deposits steadily grew quarter-over-quarter in the second, third and fourth quarters. For the fourth quarter of 2019, average deposit of $37.4 billion grew by 10% linked quarter annualized, at which deposit growth in the fourth quarter was led by growth in interest-bearing checking, which is seasonally strong in fourth quarter for some of our commercial customers, followed growth in non-interest bearing demand and money market accounts, partially offset by a decrease in average time deposits as we actively reduce higher cost deposits.
The fourth quarter 2019 average cost of deposit decreased by 11 basis points linked quarter to 0.94% and an average cost of interest-bearing deposit decreased by 15 basis point to 1.34%, accelerating the pace of decrease from the third quarter. As of December 31, 2019, the end of period cost of deposits was 0.9%, down by 11 basis point from 1.01% at the end of the third quarter. The end of period cost of our interest-bearing deposit was 1.28% as of December 31, down by 15 basis point from 1.43% as of September 30.
I'm pleased to note that since the fed began cutting the fed funds rate in July, we achieved a reduction in the cost of deposits across all of our major deposit types while at the same time also growing non-interest bearing demand balances. I would now turn the call over to Irene for a more detailed discussion of our fourth quarter 2019 financial results and our outlook for 2020.
Irene H. Oh -- Executive Vice President & Chief Financial Officer
Thank you, Dominic.
On Page 7, we have a slide that shows the summary income statement and a snapshot of tax-related and notable items during the quarter. For the fourth quarter 2019, we reported diluted EPS of $1.29 and adjusted EPS of $1.28. Our tax expense in the fourth quarter was $31 million and our effective tax rate was 14%. This compares to a tax expense of $35 million and effective tax rate of 17% in the third quarter. The decrease in the fourth quarter tax rate relative to the third quarter resulted from additional tax credit investments and a true-up of previous year's tax reserves.
Our tax expense for the full year of 2019 was $170 million and the effective tax rate was 20%. Included in the full-year 2019 income tax expense was $30 million reversal of certain previously claimed tax credits. Adjusted full-year 2019 tax expense was $140 million and the effective tax rate was 17% compared to a tax expense of $115 million on an effective tax rate of 14% for the full-year 2018. In our outlook for 2020, we project that our effective tax rate will be 15%.
Moving on to the discussion of net interest income on Page 8. Fourth quarter net interest income of $368 million decreased by $1.6 million or 0.4% linked quarter. The fourth quarter GAAP net interest margin was 3.47%, a contraction of 12 basis points from the prior quarter. The quarter-over-quarter change in our GAAP net interest margin is as follows, 15 basis point decrease from lower loan yields, 4 basis point decrease from lower yields on other interest -- on other interest earning assets including investment securities, 4 basis point decrease from the asset mix shift, and net increase in investment securities, all of which were partially offset by 11 basis point increase to the net interest margin from a lower cost of funds.
ASC 310-30 discount accretion was $6 million in the fourth quarter, higher quarter-over-quarter due to recoveries, and added 6 basis points to the net interest margin. The fourth quarter adjusted net interest margin, excluding the impact of discount accretion was 3.41%. In the third quarter, discount accretion income was $2.5 million, which added 3 basis points to the net interest margin. As of December 31, 2019, the accretable portion of the ASC 310-30 discount accretion was $10 million and the impact of accretion on our net interest income and our net interest margin in 2020 and beyond is expected to be immaterial. As such, we will no longer separately report the ASC 310-30 discount accretion. In our 2020 outlook, we expect that the GAAP net interest margin will range between 3.40% to 3.45%. This translates to a stable margin relative to our fourth quarter adjusted net interest margin of 3.41%. In our interest rate outlook, we assume that the fed funds rate will be unchanged in 2020. A tailwind to our margin, supporting our NIM outlook for 2020, is the near-term repricing benefit of our maturing time deposits.
In the first quarter of 2020, we have $3.9 billion of time deposits maturing at a weighted average rate of 1.79%, and in the second quarter of 2020, we have another $2.3 billion maturing at a weighted average rate of 1.85%. For comparison, in the fourth quarter of 2019, we originated or renewed $3.5 billion of time deposits at a weighted average interest rate of 1.28%, down from a weighted average interest rate of 1.54% in the third quarter of 2019 for new and renewing time deposits.
For your reference, we inserted Slide 9, which provides the underlying interest rate detail of our loan portfolio. Our fourth quarter 2019 average loan yield of 4.91% declined by 20 basis points linked quarter. Our loan portfolio is largely variable rate and the most impactful interest rate indices for our loans are the prime rate in one-month LIBOR.
Now turning to Slide 10, total net interest income in the fourth quarter was $63.0 million compared to $51.5 million in the third quarter. Fee income and net gains on sales of loans totaled $52.5 million in the fourth quarter, 3% increase from $51 million in the third quarter of 2019. Interest rate contracts and other derivative income was $18 million in the fourth quarter, a linked quarter increase of $9 million. Customer demand for interest rate hedging products continued to be strong in the fourth quarter and customer-related revenue was $14 million, an increase of $3 million quarter-over-quarter. The associated credit valuation adjustment was $4 million in the fourth quarter, a linked quarter increase of $6 million reflecting the interest -- the increase in long-term interest rates at the end of the quarter.
Moving on to Slide 11, fourth quarter non-interest expense was $193 million, an increase of 9% linked quarter. Excluding amortization of tax credit investments and CDI, our adjusted non-interest expense was $165 million in the fourth quarter of 2019, an increase of 4% quarter-over-quarter. The largest change quarter-over-quarter was $3.2 million increase in compensation expense, which was $101 million in the fourth quarter. Our fourth quarter adjusted efficiency ratio was 38.3% compared to 37.7% in the third quarter. Over the past five quarters, our industry-leading adjusted efficiency ratio has been under 40%. Our full-year 2019 non-interest expense was $735 million, and excluding amortization of tax credit investments and CDI, it was $645 million, an increase of 4% year-over-year.
Our full-year adjusted 2019 efficiency ratio was 38.4% compared to 39.6% in 2018. The increase and non-interest expense for the full-year 2019 compared to 2018 was largely driven by an increase in compensation expense reflecting hires throughout the year to add talented bankers to our front line and to ensure that we continued to strengthen our risk management and support functions. Additionally in 2019 and continuing in 2020, we have been making ongoing and important investments in technology to better serve our commercial and consumer customers and to grow our market share. In 2020, we will be launching a new FX system and a new commercial digital banking platform in Hong Kong, which will provide our customers enhanced cross-border payment and FX hedging capabilities, as well as better interactivity with our domestic commercial digital banking platform.
Furthermore, we are continuing to build a new consumer digital banking platform tailored to the distinct needs of our consumer customer base. Inclusive of these investments in new systems and platforms and other ongoing efforts to invest in our business, our outlook for 2020 assumes operating expense growth of 4% excluding amortization of tax credit investments and core deposit intangibles. This is similar to the rate of operating expense growth in 2019.
In Slide 12 of the presentation, we detail our critical asset quality metrics. Our allowance for loan losses totaled $358 million as of December 31, 2019, our 1.03% of loans held for investment compared to 1.02% as of September 30, 2019 and 96 basis points as of December 31, 2018. Non-performing assets as of December 31, 2019, were $122 million or 27 basis points of total assets compared to 31 basis points of total assets as of September 30, and 23 basis points of total assets as of December 31, 2018.
For the fourth quarter of 2019, our net charge-offs were $8 million or annualized 10 basis points of average loans and we've recorded a provision for credit losses of $19 million. This compares to net charge-offs of $22.5 million or annualized 26 basis points of average loans and a provision for credit losses of $38 million in the third quarter of 2019. Included in the fourth quarter net charge-offs of C&I loans, which totaled $11 million, was $8 million full recovery on a C&I loan as well as $5 million charge-off on energy loan that had been placed on non-accrual status earlier in the year.
Other C&I charge-offs in the fourth quarter came from loans that were also previously on non-accrual status and these have largely been reserved for as of September 30, 2019. For the full-year 2019, net charge-offs were $53 million or 16 basis points of average loans, compared to 13 basis points in 2018. Full-year 2019, provision for credit losses was $99 million compared to $64 million in 2018. Overall, asset quality continues to be stable, quarter-over-quarter, non-performing assets and net charge-offs decreased. As of December 31, 2019, classified and criticized assets totaled $974 million compared to $970 million as of September 30, 2019.
Currently, we estimate that the day one CECL-related increase to our allowance for loan losses will be an increase of approximately 30% from the allowance for credit losses as of December 31 2019. Our current outlook for 2020 projects at the day two provision for credit losses will range between $90 million and $120 million for 2020. This reflects our projected loan growth and our view that asset quality should be broadly similar in 2020 as in 2019. Further, the range of our provision outlook also takes into account the volatility that we expect to see a result of the forecast changes during 2020 that will drive the CECL model.
Moving on to capital ratios on Slide 13. East West capital ratios are strong. Tangible equity per share of $31.15 as of December 31, 2019, grew 3% linked quarter and grew by 15% year-over-year. The tangible equity to tangible assets ratio increased by 67 basis points year-over-year and our regulatory capital ratios increased by 45 to 75 basis points year-over-year.
East West Board of Directors has declared first quarter 2020 dividend for the company's common stock. The common stock dividend of $0.275 is payable on February 14, 2020 to stockholders of record on February 3, 2020.
And with that, I'll move on to reviewing our 2020 outlook on Slide 14. For the full-year 2020, compared to our full-year 2019 results, we expect end of period loans to increase by 7% to 8%, we expect that the GAAP net interest margin will range between 3.40% and 3.45%. Our outlook incorporates no change to the fed funds rate in 2020. With this outlook for loan growth and net interest margin, and reflecting the decline in interest rates in the second half of 2019, as well as declining accretion income in 2020, we expect that net interest income in 2020 will range from flat to growth of 2% year-over-year. We expect non-interest expense excluding the amortization of tax credit investments and core deposit premiums to increase approximately 4%.
We anticipate that the provision for credit losses will range between $90 million and $120 million. Finally, we project that the effective tax rate will be approximately 15% for 2020 as we expect to continue to invest in tax credit investments. We expect to make approximately $100 million of historic and clean energy tax credit investments in 2020 and project an amortization rate of approximately 85%. For the first quarter of 2020, we currently expect tax credit amortization will be approximately $20 million.
With that I will now turn the call back to Dominic for closing remarks.
Dominic Ng -- East West Bancorp, Inc.
Thank you, Irene. I would now open the call to questions. Operator?
Questions and Answers:
Operator
[Operator Instructions]
Our first question comes from Ebrahim Poonawala with Bank of America Merrill Lynch. Please go ahead.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Good morning.
Irene H. Oh -- Executive Vice President & Chief Financial Officer
Good morning.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Just first question, Dominic, you talked about just the impact from the China trade dispute on the wholesale trade portfolio. And there has been enough conversation around whether, how meaningful that impact has been on your C&I growth. Would love to get your thoughts around how you expect 2020 to play out for the C&I lending both in terms of the specialty lending verticals where East West has been focused on, and in terms of geographies and all the hiring that you've done. Are you going into new markets? Like what is going to be in your view driving growth on the C&I side?
Dominic Ng -- East West Bancorp, Inc.
At this point, I think that we expect the growth comes from many different industry verticals and then the general C&I, and also of course including Greater China and our cross-border business. And we feel that in general, there are different pockets of areas that would grow stronger than the others, but the overall economic condition based on a more clarity with this US-China dispute that result in the Phase 1 signing gives many of the business and our customers more comfort to start investing and growing the business.
And in addition to that, when you look at the agreement that was signed which call for China buying $200 billions more of goods from United States from the baseline of 2017, and that is $77 billion from 2020 and $123 billion in 2021 in the various sectors including manufacturing, energy and services, etc. And we feel that clearly there are opportunities for some of our clients who are exporting to China. And East West, is going to pay attention to those opportunities to make sure that we get our share of banking business.
So all in all, I would say that 2020 particularly in the second half and 2021 is looking pretty promising.
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Got it. And just I guess on a separate topic, you mentioned investments in the ForEx platform in Hong Kong and in the consumer digital platform here. Where should we see the benefits on the upsides of all those investments? Is it in higher fee revenue, or better deposit growth and just kind of, should we expect these to be needle movers in terms of growth?
Dominic Ng -- East West Bancorp, Inc.
Both. I mean, like obviously for the FX new system, it will be predominantly for fee income, but keep in mind when we have a strong FX value proposition, that can be a lead-in for us to get commercial banking business, which will then result in loans and deposits too. But that's more indirect. I think the direct part will be fee income.
From the digital banking side, that's really predominantly focused on our consumer core customer base. And so for that I think will be consumer core deposits, interest-bearing checking account, non-interest bearing checking account, so forth, and we expect that there will be more core deposit coming and that will be in the next few years.
Operator
Our next question comes from Chris McGratty with KBW. Please go ahead.
Chris McGratty -- KBW -- Analyst
Great, thanks for the question. I'm interested -- credit quality obviously improved pretty notably sequentially. There are some concerns I believe on residual effects of the energy stress in the third quarter. Could you provide maybe an update on what you're seeing in that portfolio, maybe trends in classifieds? And I believe there was a notable bankruptcy early in the quarter. I'm wondering if that's been addressed in the current reserve. Thanks.
Irene H. Oh -- Executive Vice President & Chief Financial Officer
Yes. So if we look at the energy portfolio, just to answer your question specifically, the problem loans that we identified earlier in the year and talked about in a little bit more detail on last earnings call, I think the good news is there really hasn't been a lot of new problem loans that have been identified. The one loan that you are referring to was downgraded and in our views, appropriately reserved for in the fourth quarter. In total, if you look at the balances as of September, end of -- actually the outstanding balances as of the end of September for criticized and classified assets was about $68 million, and as of the end of December that was $113 million.
Non-accrual loans, same kind of levels, for September were $21 million versus $33 million as of the end of December. Hopefully, that helps to clarify some of those questions you had, Chris.
Operator
Our next question comes from Jared Shaw with Wells Fargo. Please go ahead.
Jared Shaw -- Wells Fargo -- Analyst
Hi, good morning.
Dominic Ng -- East West Bancorp, Inc.
Good morning.
Irene H. Oh -- Executive Vice President & Chief Financial Officer
Good morning, Jared.
Jared Shaw -- Wells Fargo -- Analyst
Looking at the growth expectation, the loan growth expectations for 2020 is 7% to 8%. Does that assume that the wholesale trade business balances stay under pressure? And if we saw more Phase 2 or more confidence on the consumer -- or on the customer side, could you see loan growth potentially be higher than that with the resumption of stronger wholesale trade lending?
Dominic Ng -- East West Bancorp, Inc.
Well, I think that we expect a positive turnaround hopefully some time 2020. But now we have to keep in mind is that it's going to be a gradual process. And if you look at as I indicated in my remarks earlier, in fact, normally in the fourth quarter, we will have a search of the wholesale trade portfolio balances, but last quarter, we actually didn't and that's because everybody's holding out. Everyone knew that our President will be signing a Phase 1 and so we all sort of stand in sideline and then so why do something until we see what exactly is going to be signed on.
And now that once we get that clarity, I think people was going to start focusing on what need to be done. Some got great benefit because they are exporter to China, some also even as importer because of the agreement of not putting tariff on those particular product or the agreement to drop from 15% to 7.5%, that helps. And then, while others basically stay the same at that 25% tariff.
Now the fact is, even for those do have to pay tariff, I mean in a way, the good news is that now they know it's not jumping to 35% or 40% or 50%, or is not having the very high uncertainty that's going on of the rhetorics coming from our President and so forth. So in that standpoint, people had dealt with those tariff and managed it for the last two years, and managed them -- many of them had managed it pretty well in terms of whether it's cutting cost a little bit here and there, having that Chinese government to provide tax credit -- tax subsidy or just passed right through to US consumers and US consumers also seem to be taking those pass-through very nicely as we've seen in the retail report for the fourth quarter so far.
So all in all, I see that there will be a little bit more normalization of trade activities going on in 2020. It's going to take a few months to ramp up. And so I would expect that in the first two quarters, we shouldn't be expecting a whole lot of substantial growth but then, we'll be more or less maybe like last year, but then in the third and fourth quarter, it ought to be picking up. That's what I see in the trade side, but for the other portfolio, I think will be more or less, people looking at the general US economy that I think clearly with the uncertainty of trade dispute, by the way is not just with China but also with many of the other countries, have caused concern for many US business. And now when the business overall see what the overall interest rate climate plus some of these settlements of the trade tariffs and so forth, I think in general the business sentiment is getting a little bit more comfortable.
So we hope that the other C&I verticals that we are, will hopefully also be picking up a little bit. So that's the assumption that we have and in terms of looking at 2020 outlook and beyond.
Jared Shaw -- Wells Fargo -- Analyst
Thanks. And then just circling back on capital management, I know this is something I've asked on other calls, but capital continues to grow. The TCE ratio still growing and at substantial level. What else should we be thinking about in terms of capital management with the growth in the similar range as we saw in 2019? I guess why not come in and do a buyback and help manage capital at this point?
Dominic Ng -- East West Bancorp, Inc.
I think -- I would reiterate what we shared I think -- I guess in a more than two conference calls before that, well, first and foremost, we are a management team that are shareholders-friendly including our Board by the way. So we constantly at our Board meetings evaluate and review this sort of opportunity cost of our capital. Should we, should we not buyback? And that I'm pretty sure in our next Board meeting, we will have another very detailed discussion of this sort of alternative out there versus buyback.
One of the things that we do looked at though is that as we just shared in this earnings call, we have well above industry average return of asset and return of equity, our loan growth -- last year, average loan growth, is about 10%. And so we are still doing pretty well. And the other interesting part is that with this new dynamic that we are seeing right now that China have signed agreement in terms of better protect intellectual property and better protect companies who let's say are being pushed to transfer technology, and China now have mechanism in place to penalize state-owned enterprises or any government entities to do that.
So when we see there is a better clarity in these laws that attract foreign investment. When the Vice Minister just announced that how much China wanted to attract foreign direct investments, and in fact foreign direct investments in China even in 2019 have grown by a few percent. And all of those are indication that we at East West Bank wanted to make sure while we are looking at the obvious good choice of potential capital buyback, we also need to balance to see that, is it likely there'll be a great opportunity, what is in the US or in Greater China that we'd want to further invest to ensure we have even stronger sustainable profitable performance for many years to come.
And I can only reflect back in the last 10 years, we have deliberately spent our capital into investing in people and infrastructure, which allow us to build such a very diverse loan portfolio and deposit portfolio. So that allow at any particular time and year that if some particular sector slow down, the other sectors picked up. There are not many banks in the country that have a very evenly spread of C&I, CRE and residential consumer portfolio. That's spread out very nicely in different categories and allow us to put lever at a different time.
We would like to continue to further diversify our loan portfolio, improve our fee income, etc., and so we'll continue to make those investments. But at any point of time, we feel that even with those investments and we still have excess capital, that is redundant that obviously we will step in and start making a buyback. So that's the plan.
Operator
Our next question comes from Brock Vandervliet with UBS. Please go ahead.
Brock Vandervliet -- UBS -- Analyst
Thank you for the question. The derivatives business was obviously great quarter -- great couple of quarters here. With the fed probably done, should we be looking for this to kind of tail off or or not?
Irene H. Oh -- Executive Vice President & Chief Financial Officer
Yeah. Brock, so if you look at 2019 from a customer revenue perspective, the revenue from our interest rate contracts and other derivatives was $42 million net of the CDA adjustment, rounding there at $40 million. When we look at 2020, although we are confident that we will be able to grow fee income line items among all other categories just given the nature of the rate curve, the inversion earlier this year that really supported the volume increase we had in the third quarter in particular and second quarter. We don't expect this level of customer revenue in 2020 for IRC.
Brock Vandervliet -- UBS -- Analyst
Got you, OK. And separately, as you could imagine, CECL is providing all sorts of fun with numbers for analysts...
Irene H. Oh -- Executive Vice President & Chief Financial Officer
For us too.
Brock Vandervliet -- UBS -- Analyst
And as I look at your reserve at the true-up and what you're anticipating for provisions, can you help us dimension what you may be looking at in terms of charge-offs? Is the number of -- 20 basis points, is that reasonable to expect going forward, or too high?
Irene H. Oh -- Executive Vice President & Chief Financial Officer
Yeah. So Brock, that's a great question. And I want to just kind of caution, this is our view today for the day one reserve. Actually that may change as our models change, our forecast change and there is some finalization that we're still doing in particular on the qualitative factors. But given the call we wanted to share what our views were today and that is that 30% increase from the year-end in current model calculation.
On day two, we have traditionally given the guidance on the provision for the full year. As you probably have noted, the range that we're providing for the provision is wider and that's largely given our kind of view that compared to the incurred model, likelihood is that there will be more volatility on the provision over the course of the year, driven by kind of changes to the forecast. So that's certainly that we're factoring. Overall when we will look at the credit environment, we think it will be relatively the same and with those numbers we're modeling in kind of gross charge-offs at similar levels to 2019, if that's helpful for you.
Operator
Our next question comes from Michael Young with SunTrust. Please go ahead.
Michael Young -- SunTrust -- Analyst
Hey, good morning. Thanks for taking the question. I wanted to ask about the sort of loan to deposit ratio. I know, Dominic, you mentioned that you wanted to continue to operate within the 90% to 95% range. But given kind of where rates are and the stability here, do you think that you would allow that maybe to drift higher as it may be easier to put on new deposits at lower rates now?
Irene H. Oh -- Executive Vice President & Chief Financial Officer
Yeah, I think first and foremost, we will always want to ensure that we have enough liquidity, right, and that we have enough core deposits to fund our loan growth. That -- franchise value for bank is about core deposit franchise. So that range that we have, the 90% to 95% is a range that we're comfortable with. At this point in time, I do not think we'll inch that up much higher.
And to kind of more specifically address your question, if we have the opportunity to reduce kind of bring on additional deposit at a lower cost, what we'll probably do with that is let some of the higher operating -- higher cost deposits run out.
Michael Young -- SunTrust -- Analyst
Okay. And then as a follow-up, I think at the beginning of last year, you had mentioned a couple demand deposit focused initiatives particularly on the consumer side. I just wanted to get an update if any of those were moving ahead or if we've seen any benefits from those at this point.
Dominic Ng -- East West Bancorp, Inc.
It went really well in 2019. And so with that momentum, we will continue in 2020. So our consumer banking team, specifically the retail branches are all geared up to keep going out there and bringing in small business customers, one at a time and then we opened many many accounts last year. And I expect them to continue to use their center of influence to help them, CPA lawyers and so forth, to help them to continue to open the small business account, one at a time.
Operator
Our next question comes from Gary Tenner with D.A. Davidson. Please go ahead.
Gary Tenner -- D.A. Davidson -- Analyst
Thanks, good morning.
Irene H. Oh -- Executive Vice President & Chief Financial Officer
Good morning, Gary.
Gary Tenner -- D.A. Davidson -- Analyst
Good morning. I wanted to ask the question -- or a question on the 2020 loan growth outlook, maybe a little different way. If we look at 2019, the end of period year-over-year loan growth was a little over 6% and certainly pressured in the fourth quarter by not having wholesale trade benefit that you typically do. So Dominic, given your comments about a better outlook for the back half of the year on wholesale trade as there are some more clarity for your customers, why wouldn't that normalization maybe for 2020 help a better more positive rebound in overall loan growth? Is it the expectation of a slowdown or slower pace of growth in the other loan segments?
Dominic Ng -- East West Bancorp, Inc.
Well, I think that overall what we project right now is based on our current activity and we do expect that some of these sort of positive momentum, it's going to take a little bit time to ramp up. So therefore, and right now, we prudently project to be 7% to 8%. Obviously we'll revise our guidance if we actually see even stronger momentum going forward.
Gary Tenner -- D.A. Davidson -- Analyst
Okay. The rest of my questions were asked and answered, so thank you.
Dominic Ng -- East West Bancorp, Inc.
Thank you.
Operator
[Operator Instructions]
Our next question comes from David Chiaverini with Wedbush Securities. Please go ahead.
David Chiaverini -- Wedbush Securities -- Analyst
Hi, thanks. A couple of questions for you. So the first one I wanted to follow up on energy. Are you planning to grow the energy book, or do you -- or conversely, do you plan to reduce or exit this portfolio given the credit issues?
Dominic Ng -- East West Bancorp, Inc.
At this point, I don't think there is any -- it's going to be very low likelihood of any growth. The reason is because obviously as everyone know, in the industry that the equity investors hard to find in these days. So therefore, in order for us to do good deals, we need to have strong equity partners to have us to put on senior debt. Quite frankly at this point right now, I think the likelihood of what's growing is very, very low. I think that there will be a higher likelihood we'd probably reduce the portfolio just naturally because of some paydown and so forth.
David Chiaverini -- Wedbush Securities -- Analyst
Thanks for that. And then shifting gears, more of a housekeeping question. You mentioned about the guidance for tax credit amortization expense. You said $20 million for the first quarter and you gave the full-year amount, but do you happen to have any guidance for the second quarter, third quarter and fourth quarter?
Irene H. Oh -- Executive Vice President & Chief Financial Officer
We do not, at this point. But you have the full-year number, and that will help you.
David Chiaverini -- Wedbush Securities -- Analyst
Yeah. Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Dominic Ng for any closing remarks.
Dominic Ng -- East West Bancorp, Inc.
Well, thank you all for joining the call. First, I wanted to apologize for a little bit of a confusion of my remarks earlier because my mind has already gone to celebrating the Chinese Lunar New Year that will be coming this Saturday, by the way. This is a very, very special year, the Year of the Golden Rat. It's one of -- one out of every 60 year that would happen. It's the longest year ever for Chinese New Year because it's 384 days, and there are a lot of special days throughout this year, which I would see that many of our customers would have weddings, give birth and starting new business, etc., etc. So East West Bank is going to be busy.
And so we hope that this most auspicious year that happens only once every 60 years, will bring better fortune and success to everyone around the world. And on behalf of all my associate at East West Bank, I would like to wish you all Happy Lunar New Year. Thank you.
Operator
[Operator Closing Remarks]
Duration: 55 minutes
Call participants:
Julianna Balicka -- Director of Strategy and Corporate Development
Dominic Ng -- East West Bancorp, Inc.
Irene H. Oh -- Executive Vice President & Chief Financial Officer
Ebrahim Poonawala -- Bank of America Merrill Lynch -- Analyst
Chris McGratty -- KBW -- Analyst
Jared Shaw -- Wells Fargo -- Analyst
Brock Vandervliet -- UBS -- Analyst
Michael Young -- SunTrust -- Analyst
Gary Tenner -- D.A. Davidson -- Analyst
David Chiaverini -- Wedbush Securities -- Analyst
