East West Bancorp Inc (EWBC) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2008 East West Bancorp earnings conference call.

My name is Ahmed, and I'll be your coordinate for today.

At this time all participants are in a listen-only mode.

We will be facilitating a question-and-answer session towards end of today's conference.

(OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms.

Irene Oh, Senior Vice President of corporate finance.

Please proceed, ma'am.

Good morning, everyone, and thank you for joining us today to review the financial results of East West Bancorp for third quarter of 2008.

In a moment Dominic Ng, our Chairman, President, and Chief Executive Officer, will provide highlights for the quarter.

Then Tom Tolda, our Executive Vice President and Chief Financial Officer, will review the financials.

We will then open the call to questions.

First, I would like to caution participants that during the course of the conference call today 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.

We wish to caution that you these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties.

For a more detailed description of factors that affect the Company's operating results, we refer to you our filings with the Securities and Exchange Commission, including our annual report on Form 10-K for the year ended December 31, 2007.

Today's call is also being recorded and will be available in replay format at www.eastwestbank.com, and www.streetevents.com.

I will now turn the call over to Dominic.

Thank you, Irene.

Good morning.

Thank you for joining us on today's call.

Yesterday afternoon we announced financial results for the third quarter of 2008, and we declared a dividend payment on both our common and preferred stock.

Our financial results for the quarter indicative of the challenging economic environment we are currently faced with.

Tom will discuss some of the details of our financial performance later in the call.

First, I would like to provide an overview of our financial results and discuss credit trends we are seeing.

We reported a net loss for the quarter of $31.2 million after a noncash other-than-temporary impairment charge of $53.6 million and provision for loan losses of $43 million.

Excluding this one-time OTTI and loan loss reserve, core operating income was $48 million.

The OTTI impairment charge resulted from $47 million impairment on Freddie Mac and Fannie Mae preferred stock and also $6.6 million impairment on pooled trust preferred securities.

We believe that East West made significant progress in the third quarter by strengthening the balance sheet and improving both credit quality and overall liquidity.

Unfortunately, the progress made during the third quarter and the core operating performance of East West is clouded by noncash items.

Again, Tom will address the securities impairment charges later in the call, but first I would like to call attention to the solid progress we made during the quarter.

We tackled credit issues head on and made strong progress during the third quarter in reducing total delinquencies.

Quarter to date we experienced a substantial decrease in overall loan delinquency and stabilization in overall credit issues.

We continue to build the allowance for loan losses, which total $177.2 million, or 2.14% as of September 30, 2008.

We also significantly improved liquidity by increasing our borrowing capacity.

Additionally, the third quarter results show substantially lower operating expenses, as we continue to contain costs and improve efficiency during this very challenging economic cycle.

Let me first address our progress made in problem credits.

Overall I believe we make good progress in the third quarter in dealing with problem loans.

Total loan delinquency decreased $53 million, or 14% at September 30, 2008, compared to June 30, 2008.

Additionally, nonaccrued loans and nonperforming assets are stable at $177 million and $200 million respectively.

In fact, it was a mere $7 million increase from June 30, '08.

The small percentage increase in NPA is primarily due to decrease in total loan balances, which is consistent to our plan for this year.

On the contrary, 30 to 59 days delinquency dropped from $171 million at June 30 to $111 million as of September 30.

60 to 89 days dropped from $66 million to $54 million three months later.

So we are making good progress in the overall delinquency as of September 30.

While many of our competitors have seen sharp increases in delinquency and nonperforming asset level in the third quarter we actually were able to reduce the total delinquency by a substantial amount.

We believe that the proactive status we took on identifying and resolving problem credits earlier this year has positioned us ahead of our peers in dealing with credit issues going forward for 2009.

During the quarter, net loan charge-offs were $39.7 million, up $4.9 million from the second quarter.

All of the residential construction and land charge-offs for the third quarter were loans that have been identified as weaker credits in our comprehensive loan review conducted earlier in the year.

We continued to build the allowance for loan losses and grew the allowances to $,177.2 million or 2.14% of our outstanding loans.

We provide a total of $43 million for loan loss during the quarter, down from $85 million in second quarter and $55 million in the first quarter.

Additionally, the allowance to nonaccrued loans increased to 100% coverage as of September 30, 2008.

We made great progress in reducing REO and other problem loans, particularly the residential construction and land loans, during the third quarter 2008.

We sold a total of six REO properties during the quarter at prices very comparable to the carrying value.

Additionally, we sold a total of 12 notes during the quarter.

All of them were nonaccrued loans or problematic residential construction or land loans.

I'm pleased to report that we have made good progress again during this first four weeks of the fourth quarter to resolve NPAs, either by obtaining payments from the borrowers or by actively selling REO properties and notes, and we'll continue to do so for the rest of the quarter.

Quarter to date, construction and land loan balances have decreased $235.4 million.

Additionally, the total unfunded commitment on construction loans has decreased $185 million from $684 million at June 30 to $499 million at September 30.

For the first three quarters of the year we have had a major focus on reducing credit risk exposure, and we expect to continue in this mode for the remainder of the year.

We strongly believe that if we continue the strong momentum from the third quarter to pare down problem loans and REO assets we'll be in good shape to start the new year.

At this point we have not seen any meaningful deterioration in the C&I, trade finance or income-producing commercial real estate portfolios.

As a direct result of our continuing effort to reduce credit risk exposure, particularly in our portfolio in our trade finance portfolio, which totaled $389 million of outstanding balance, as of September 30, 2008, we have a zero delinquency and trade finance loans.

In anticipation of the -- that the economy and employment levels may weaken we have continued our proactive approach of critically monitoring our loan portfolio very closely.

In particular, we are carefully scrutinizing the C& I, trade finance, and construction portfolio.

Additionally, we have continued to build the reserve for loan losses in light of these additional economic risks and in anticipation of potential future deterioration.

As of September 30, 2008, we have increased the allowance for loan losses, both in absolute dollars and in percentage of total loans across all loan categories.

On a final note, I would like to discuss our expectations for the remainder of 2008.

We maintained a previously-announced guidance and estimate that earnings per share for the fourth quarter of 2008 will be positive and range from $0.11 to $0.13.

This guidance is based on projection of a net interest margin of about 3.05% for the fourth quarter.

This net interest margin projection for the fourth quarter is based on the assumption that the fed funds rate will decrease another 50 basis points when the fed meets at the end of this month.

Additionally, we believe that the provision for loan losses for fourth quarter will be at a low level from the last three quarters.

Based on the credit trends we are seeing we currently believe that provision for loan losses will approximate $35 million for the fourth quarter of 2008.

And with that I would like to turn the call over to Tom Tolda, who will discuss our third quarter 2008 financial results in more depth.

Thank you, Dominic, and good morning, everyone.

I'd like to start with our third quarter reported net loss of $31.2 million, or $0.50 per common share.

As Dominic noted, the primary driver for the net loss reported for the third quarter was the noncash other-than-temporary impairment charge on our Fannie and Freddie preferred stock which cost $47 million, and an additional $6.6 million OTTI charge against our pooled trust preferred securities, which combined cost $0.85 per share pretax in the quarter.

These charges, coupled with the $43 million provision for loan loss, drove the loss reported in the quarter.

Ironically, it wasn't that long ago that an investment in Fannie Mae and Freddie Mac was thought to be a very solid one; yet this quarter many banks were confronted with a new reality having to write down their entire investment in these securities to a market that was between $0.03 and $0.05 on the dollar at quarter end.

The market for pooled trust preferred securities is inactive at this time, and this illiquidity has adversely impact the fair value of these securities.

However, these securities continue to be well collateralized and were not impacted by recent downgrades by rating agencies.

Given the recent US treasury plan to strengthen bank capital, increase liquidity and the likelihood of further consolidation of weaker banks, we believe these events strengthen the prospects for these securities going forward.

As noted in Dominic's earlier comments, positive developments are evident in the area of credit.

Delinquency is down, progress is made in reducing problem assets, construction and land portfolio balances are reduced and nonperforming assets appear to be stable.

The significant reduction in provision for loan loss from $85 million in the second quarter to $43 million in the third quarter was largely expected and we anticipate this going lower in the fourth quarter.

Excluding OTTI charges and provision for loan losses, pretax earnings in third quarter were $48 million versus second quarter's $49.9 million.

The variance was primarily due to a $5.7 million lower net interest revenues, nonrepeat of a $3.4 million gain on sale of securities in the second quarter, partly offset by $7.1 million lower noninterest expenses in third quarter.

Net interest revenues declined in the quarter on lower portfolio balances, down $367 million, and 23 basis point decline in net interest margin.

The decline in margin is a result of reinvesting loan payoffs into short-term, lower-yielding treasury securities and fed fund assets, and also due to the impact of lower fed funds earlier in the year.

In fourth quarter, we plan to use some of these short-term investments to pay off higher-rate FHLB borrowing that is will come due, thereby lessening our funding costs and improving spreads.

We have also taken actions to improve short-term investment yields that should also help.

As Dominic mentioned, further strengthening of our balance sheet has been a huge focus for us in 2008 and is evident in: Our capital raised in April; growing cash and near cash balances; lessening our loan to deposit ratio; increasing our borrowing capacity $1.1 billion in the quarter to $2.8 billion, or more than a third of our deposit base; and significantly increasing our allowance for loan losses to 2.14% of total loans and 100% coverage of our nonaccrual loans.

We are confident that these actions, among others we continue to take, position us very well for the uncertain times we are in and will allow us to capitalize on opportunities going forward.

Shifting gears for a moment I'd like to comment on our expense trends.

Throughout the year, we have been managing our costs wisely, yet credit cycle costs involving the reappraisal of real estate, additional legal costs, and other credit review-related costs have offset some of the progress getting made.

In the third quarter noninterest expenses decreased $7.1 million versus second quarter, largely through attrition and selective hiring policies.

We were able to reduce staffing on a net basis 145 FTE, or about 10% from December 2007.

We also reduced incentive compensation and other related expenses that were fully realized in the quarter.

These efforts, along with ongoing deferral and/or cancellation of discretionary investments are continuing.

Opportunities to further increase efficiency are being pursued, and we expect costs will continue to moderate as we approach year end.

Our efficiency ratio was 46.4% in the third quarter and compares very well to others in the industry.

On a final note, we will be able to record the full impact of the tax benefit from the GSE preferred stock OTTI impairment charge in the fourth quarter and we'll pick up $5.7 million in tax benefit going into the final quarter of the year.

This tax benefit is already reflected in our regulatory capital in accordance with regulatory guidelines made available in early October.

In closing, while we took a heavy pounding in the quarter from noncash charges, good progress is evident in reduced credit exposures, we continued to increase total risk-based capital now at 13.12%., we further strengthened liquidity and improved efficiency.

Barring unforeseen events we expect to return to profitability in fourth quarter and are well on our way to better positioning ourselves for growth and opportunities in 2009.

With that, I'll now turn over the call back to Dominic.

Thank you, Tom.

Again, I like to thank everyone for joining the call today and for your continued interest in East West.

I would now open the call to questions.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Joe Morford with RBC Capital Markets.

Please proceed.

Thanks, good morning, everyone.

Good morning.

I guess I just wondered if you could comment on the values realized in the sales of nonperforming loans and REO in the quarter and how do they compare to the carry values on your books at June 30th.

And also along those lines, based on your ongoing review of the portfolios, can you update where you think the current average LTV stand for the residential land and construction portfolios, either relative to last quarter or at origination?

Thanks.

Let me answer the first question on the value of the sales of REO and notes.

I think we won some and we lost some, but overall, it was a 9% discount from the carrying values for all REO and note sales taken place.

We have taken the path that we worked on these loans one at a time rather than doing a bulk sale and currently I think the book sale value is quite depressed.

Obviously if you looked at what major banks were doing, like Merrill Lynch and some of the other big guys out there, are selling them at huge discounts, so if we go out there and do a big bulk sale I think that we are probably not doing our service appropriately in terms of fiduciary responsibility.

But, on the other hand, when we worked on these loans and REO one at a time, we are making some pretty good progress, and there are some that were sold above the new appraised value and then there are some of them actually we did it below.

But all in all what we're doing is that we just work on them one at a tame and making good progress, and as of, I think at September 30, it was a 9% discount from our carrying value.

So that was the first question, now I don't remember the second question.

It was just any read on current average LTVs for the residential land and construction portfolios?

Joe, this is Tom Tolda, and with regard to the loan to value, on the residential construction we still are around that 80% level with land just short of 70% loan to value at this point.

Okay, great.

And then one last just housekeeping thing.

Just to clarify, the guidance for the fourth quarter on the EPS being $0.11 to $0.13, I think you said, does that include -- that includes the $0.09 tax benefit?

Yes, it does.

Okay, perfect, thanks so much.

Thank you.

Your next question comes from the line of Ken Zerbe with Morgan Stanley.

Please proceed.

Hi, good morning.

Good morning.

On the trust portfolio, I was actually wondering if you could tell us, you took the $6.6 million write-down there.

How much do you have left on your books and what's the unrealized loss on that amount, as well?

Sure, Ken.

With regard to the unrealized loss, currently, we're at $54 million unrealized loss and the face value of the securities were $134 million.

That's the par value, $134 million?

That's correct.

Got you, okay.

And I guess just in terms of compensation expense, obviously we saw a huge drop this quarter and I know you said you keep expenses down, but was there any one-time adjustments in the comp expense, or is that really a correct ongoing number to use?

Yes, we had -- there were adjustments in there in terms of the compensation and so forth that I referred to.

However, we do anticipate that this new level would continue into fourth quarter.

Okay, great.

Thank you very much.

Sure.

Your next question comes from the line of Aaron Deer with Sandler O'Neill.

Please proceed.

Hi, good morning, everyone.

Good morning.

Wonder if you could explain the deposit flows in the quarter.

It sounds -- it looked like there were some big declines in money market and jumbo CDs and then some big gains in consumer CDs.

What was driving that?

Well, in terms of the decline, I think that a couple of things is happening.

If you look at the chaotic banking market for the last few months, because of the fear of depositors about what exactly is FDIC insurance and all that, and this still affect the entire country.

And what we have done, actually, while most of our customers are feel pretty calm and not doing anything, we actually took a very, very proactive action to educate our customers regarding FDIC insurance.

Now, keep in mind that the vast majority of the time, for the last three months, insurance only up to $100,000, versus $250,000, we were actually very busy educating our customers in terms of getting full insurance, and we have been a member of Cedar's for years.

We really don't need to do much with it, but with this changing environment we feel that it's only appropriate for those customers who really do not understand bank's financial performance, safety, et cetera, it will be most prudent for us to take a proactive stand to encourage them to -- if they wanted to sleep good at night and not worrying about anything, in terms of the safety of the insur -- of the deposit, that we will get them into the Cedar's Program, which is get them fully insured up to $50 million.

So through that process we actually help a lot of customers, and what you'll find is that our core deposits in the NOW account, money market account, and even some of the DDAs, have slipped down to the time deposit area because our active effort to helping the customers to go to the Cedar's Program, which can only be offered at time deposit, and therefore you find many more deposits go in that direction.

In terms of -- there are also more deposits at less than $100,000, but many customers also have taken the position to restructure their deposit by knowing the fact that they have many more, let's say, family members that can open a new account that they can actually take one account from $600,000 and split it up into six into $100,000 each and there are more of that activities taking place.

So all together I think that we've seen some of these shift in deposit mix, which I think that from a total core customer standpoint it's more or less the same customers that we have in the past, and it's just that because of the changing environment in the banking industry that we have customer making these type of directions.

And moving forward, I think with the $250,000 of limit and also with noninterest-bearing deposit being fully insured, plus the fact that we also get additional insurance for money market account, I think it would change the profile also slightly.

But I think that to a certain extent the deposit mix we probably don't want to pay too much credence simply because many of these movement are somewhat artificial rather than that have any major significant changes going on with our customer base.

Okay, that's helpful.

And then, Dominic, what are your thoughts on the TARP Capital?

Were you approached by your regulators and is that something will you seek, and if so how much would you think would be appropriate?

Yes, our regulators have talked to us about this looks like a very attractive thing, and they actually would have no problem to see us going in and then to -- they welcome the fact that if we want to apply they would love to help us through the process and so forth.

And we at East West do not take these type of opportunities lightly.

So, in fact, we spent the last two weeks gathering information from anyone out there who seems to know more than we do, and we've been getting a lot of information, and, in fact, just the past weekend, Friday and Saturday, we had a board retreat and spent a significant amount of time discussing the pros and cons about joining this program.

The key things that we wanted to address with our board members were specifically if we do get -- since East West have pretty good -- I mean very good capital ratio, if we do get these additional capital coming in, how should we deploy our capital?

And that's something that we will very -- we feel very good that this weekend we came to a conclusion about specific steps that we could've taken if we were able to get these additional capital and we feel confident that we will be able to deploy this meaningfully, whether it's in lending, gathering deposit and act acquisitions without ever thinking about going outside of our comfort zone or doing things that we don't feel that we are capable of doing.

And so with that conclusion the board have approved (inaudible) management to go ahead and apply, which we have done yesterday.

Perfect.

Thank you, Dominic.

Your next question comes from the line of William Wallace with FBR.

Please proceed.

This is James Abbott calling.

How are you guys?

(LAUGHTER) Good.

Just couple questions.

Several of mine have been answered, but do you have the reserve on your cash grade loans, a ratio for us on that?

I know that you've built your reserve ratio to a significant percentage relative to most other companies in the industry, also looking for the reserve to the past grade loans?

Do you have that number, Dominic, with you?

We don't have that readily available, but we can get back to you, James, shortly with that.

James, it's Irene.

Let me let you know.

So our total allowance is about $177 million.

Of that $144 million are for our fast five loans.

So we don't separately break out what it is for past loans, but for FAS 5 it's $144 million.

The remaining $33 million are for the impaired FAS 114 loans.

Okay.

Okay, thank you.

And then another -- this is on the expense issue is the deposit insurance expense as we go into the next year, are we looking at -- what basis point run rate do you anticipate or ha -- right now currently it's running around nine, ten basis points annualized, unless there's someplace in there that I'm not aware of.

Where do you see this moving to in 2009?

Well, we expect that the FDIC deposit insurance assessment will go up, because the FDIC chairwoman has indicated very clearly that's going to happen.

So we have not yet finalized our guidance at this point, because of -- for 2009 because of all these changes that may be happening, but we will be -- definitely, you can count on the fact that we will make sure the minute we get better information from the FDIC that we will put that number through and be able to come up with a finalized number.

Because what's happening right now is that with the fed fund rate dropping another 50 basis points, with the likelihood that we may be getting significant a amount of capital, which we would deploy and do in different things, I think there is enough factors that are taking place for 2009 that it will be rather unproductive for us at this moment to put out 2009 guidance and that's the reason why we only put out the 2008 fourth quarter guidance, which we feel very comfortable because it's only three months and we already almost into one month, and we feel pretty confident about where that is.

But when it comes to 2009 there are so many additional factors that may affect the numbers, so we feel at this point that what we're going do is just focus on doing what we set to do at that the beginning of the year; that is pare down nonperforming loans to a level that we will be ahead of our peers, and increase the liquidity so that we will be very, very safe and sound balance sheet, and pare down the operating expenses so that when we ready to go own and start aggressively doing more business when the economy starts rising that we in a much, much lean and mean position so that we will be able to do better.

And also, not to be tempted to go out there and start offering substantially high rate for deposits because at this very, very challenging economic environment, many banks are out there paying huge premium, and high rate to attract deposits.

We try to stay away from just going to that direction, because eventually, I think if we continue to pay higher and higher rate it will definitely damage our margin.

I think at this point our margin is depressed primarily because of, one, we have -- we had nonaccrual loans to deal with.

Secondly is that with the fed fund rate dropped to this low level, obviously, banks that have higher DDA account will be suffering, like us.

But eventually some day the fed funds will have to rise back up to a more normalized level, and at that point we'll be able to enjoy much better margin than those who are paying much higher deposit rates.

So we are trying to focus on these areas right now and at this point we are not going to be spending the effort to trying to figure out the '09 numbers yet.

Yes, I'm sorry, I didn't mean to ask for guidance on all of '09, I was just trying to understand the deposit expenses, because that's something that at least we have -- I don't want to mis model or overstate it.

It will go up, but because of the increase from the FDIC, that's one.

And secondly, we expect deposits to grow in '09, so both volume and both rate will affect the expenses to go up substantially.

Okay.

Then lastly -- and I appreciate you taking all these questions -- but on the trust preferred securities pools, I know there were some income notes and a lot of BBB rated product in there.

What was -- where did the impairments come, on what tranches?

James, we had impairment on the [Trapeza 12] -- I'm sorry, Irene, did you --

Yes.

James, we had three secur -- okay, let me start over.

We had five trust preferred securities where there was impairment.

Three of those were income notes and two of them were BBB rated.

One of them in particular, most of the impairment came one security, which had been downgraded by Moody's.

Additionally this was a security where there was REIT and homebuilder exposure, so there was a little bit of a credit issue with that one.

Okay.

And also the income note balances as of September 30th was about $1.5 million.

That's the total.

That's mostly (inaudible).

Okay, thank you very much.

Your next question comes from the line of Joe Gladue with B.

Riley Company.

Please proceed.

Good morning.

Good morning.

I know this is somewhat of a moving target, but just in terms of the guidance, particularly on the provision, any reason to believe there's any greater visibility this quarter that you might have had last quarter or that you might any better comfort level for where you think that'll end up in the fourth quarter?

Well actually, very quarter's getting better.

I tell you that the -- I would say that from my perspective the hardest time for me was actually December 31st.

I absolutely had no idea what on earth was going on then.

Came March 31st it become more apparent that the economy was going to be substant -- getting substantially worse and that's why we took the approach of doing 100% review of every single one of these residential construction loans and land loans, and later on even including the commercial construction loans and even some of the high LTV commercial real estate.

We also implement a pretty much now almost 100% review of C&I loan and trade finance loans.

And the whole idea was to get ourselves in position that we know better in detail every single loan in our portfolio.

Now -- but while we're doing all that I think we have a very, very good feel of the characteristics of our loans.

We have no way of controlling the market, so while I knew the market is going to be really ugly back in June I had no idea Lehman Brothers would file bankruptcy, AIG would be taken over by government, and Fannie and Freddie and all these other stuff that are happening.

Also, and after all this still bad stuff happening, I have no idea now we got TARP and then most banks will get capital.

So these are all changing targets that is hard for us to predict, but I can assure you that our loan portfolio, I think we've got a much better visibility today than a month ago or two months ago or three months ago simply because every day we are paring down these -- not only by selling the REO and the notes -- the problem notes that makes us feel comfortable that we are reducing exposure.

Not only that but because we are reducing the delinquency dramatically that we feel that we're reducing exposure, but more importantly, every day we are working with existing customers with past loans, loans that are paying as agreed, have no problems, but fundamentally because the economic conditions of the market some day they may potentially be a problem.

But we have been aggressively for the last three to four months working with these, what I call good current paying customers and making sure they do not become a problem, let's say six to nine months from now, which requires us to tighten up the debt covenant or maybe requires to ask for additional collateral and -- or may require to us ask for borrowers to put in additional guarantor that has substantially better net worth.

All of that kind of things are taking place for the last few months, one loan at a time and so as of today, we feel substantially more comfortable that I think that we have a much better grip of this portfolio.

Now that's not to say that because of all the bad things that taken place that we wouldn't take losses, simple because of the fact that the market has deteriorated dramatically.

Every one of us can see it just by reading the media report in terms of how home prices have dropped, how there is so many retailers or small business filing bankruptcy and all that kind of stuff's going, so there's no question that despite the fact that we have taken substantial a reserve as of June 30, and the deterioration of market have caused us to take some further write-down on some of the loans, and as I indicated earlier, the REO and problem loans that we sold result in a 9% discount.

Had it not for these rapid deterioration of the market, we would probably able to sell these loans quickly with a gain, but because of the very challenging and declining market, plus the fact that the last month or two I think that quite a few investors also get scared and back away from the opportunity.

So these are the kind of challenging market we dealing with, but our position is that we'll aggressively -- to continue to pare down these problem loans, because if we don't do that, who knows, six to nine months from now the deterioration of the market value of these existing portfolio that we thought we had a very good handle and we thought that we had provided adequate reserves, may deteriorate even further.

Let me share with you my experience in the early '90s when Southern California was going through an extreme -- an extraordinary real estate recession back then.

We were paring down real estate loans in '91, '92, but there were a few them we did not take quick action and we thought those customers are doing fine, they will be okay and we work with them, but eventually came to '94, like four years later, customer exhaust all their liquidity and when that customer at that time went back four years later the deterioration of the value of the collateral has dropped substantially, so we feel that early action now to try to find a way to alert our customers about the severity of the problem and early action now to trying to resolve these problems credits in many different ways is the right thing to do and that's we're going to continue to focus on that.

All right, thanks, that's helpful.

Of course along those same lines how much of the remaining land and construction loans are in the Inland Empire or other distressed areas and what portion of those are already classified as nonaccruing versus still accruing?

Hi, Joe, this is Irene.

So if we look at our exposure in the Empire for land we have about $40 million as of September, residential -- oh, excuse me, $157 million, and then of residential construction a total of about $70 million, and about $100 million commercial construction.

All right.

And I guess lastly I'll ask the $2.8 billion of new liquidity, is that all new unused liquidity or is part of that already used?

Joe, of the $2.8 billion this is both FHLB and Federal Reserve borrowing capacity, which is not utilized.

Okay.

All right, thank you.

That's it.

Your next question comes from the line of Julianna Balicka with KBW.

Please proceed.

Good morning.

I wanted to follow up on some of your comments on the call so far.

You had mentioned the decrease in unfunded commitments from $684 million to $499 million, was that residential construction only or did that include land, and if not land what's the land commitments, please?

Julianna, primarily that decrease is residential construction.

There's a little bit of unfunded commitment on the land but very low, maybe $15 million.

OKay, very good.

And then continuing on, you discussed reinvestment of payoffs into treasuries and other low-yielding securities, so going forward in the fourth quarter are you going to continue that strategy or are you going to change into a different kind of strategy -- I mean different kind of securities?

Yes, Julianna, what we be doing is paying down those FHLB borrowings that coming due in the fourth quarter and into next year, so that will give us a boost on the margin as we move forward here.

We parked the -- these cash into low-yielding securities back in the third quarter because there wasn't much Federal Home Loan Bank advances coming due in the third quarter, but we would have pretty a sizable Federal Home Loan Bank advances due.

So we also have -- these borrowings are coming due at like five and change, 5% range, and given that the fed funds right now are invested at the 2% range we should pick up some additional margin as this occurs.

And then I know you are not giving guidance for 2009, but assuming no TARP capital how would you expect your margin to behave?

We would expect the margin to improve going forward and I think that that's a function of the lower cost borrowings.

I think as the -- to the extent that the environment improves I think we can go a little bit longer with some of the investments that we've been making to also enhance yield, and then with the -- to the extent that we can come back into the lending space I think new production would also enhance the yields on the portfolio going forward.

Very good.

And for how much -- you said you applied for TARP and how much did you apply for?

We are looking at to get close to the max, and that's what we plan to do, which about of a $300 million.

$315 million.

Yes, just over $300 million.

Great, very good.

And I will step back now.

Thank you.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of Lana Chan with BMO Capital Markets.

Please proceed.

Hi, good morning.

Good morning.

Most of my questions have been answered, but could you just give us an update on where you are with the loan review process?

I know you completed it pretty much at the commercial loans reviewed in third quarter, but if you could give us an update where you are on the commercial real estate front?

Yes, we -- actually we pretty much have complete a one-time review of just about everything and so now is what I call the ongoing review.

So just because we review it once, with the market conditions change a lot of things just need to be revisit again.

If you look at commercial real estate markets, let's say three months ago versus today, there was -- I would say that there was some dramatic economic factors that have changed that potentially can add risk to the portfolio.

Now, the good news for us is that, no, this very low LTV does make a difference, and that's why as of today we still have very little problem that we identified from the commercial real estate portfolio, but we continue to look at industry-specific risk to try to determine.

For example, in California, how would this economic crisis that are happening globally would affect, let's say, tourist industry, which ultimately will affect hotel business and how would it affect like -- general business would affect office buildings market.

How would that affect retail business that would ultimately hurt the retail centers.

And how about import/export business that will actually have a negative impact to industrial warehouse.

These are the kind of things that we are going through right now, step by step, and trying to analyze the economic situation globally and which ultimately will affect what's happening within our portfolio.

And both from a commercial real estate and also C&I and trade finance.

Fortunately for us at this point (inaudible) because we're such a small consumer lending business, so what's been happening right now and throughout the country regarding consumer credits, such as home equity line and credit cards, auto loans and stuff like that really doesn't have auto loans and stuff like that, really doesn't have much of an impact to us at all.

So in that regard I think that we feel pretty good about where we are today and that we will continue to diligently review and monitor the C&I, trade finance and commercial real estate portfolio, in addition to these construction and land loans that we know very, very, very familiar with.

Thanks, Dominic.

Also as a follow-up question, on the residential construction and land portfolios is there any way to give us an estimate of what you think the cumulative remaining losses are on those portfolios?

Cumulative remaining loss.

It are you talking about the reserve that we set?

Yes, I guess that implies it, yes.

Yes.

So if we look at the specific reserve that we set for the land and construction loan, Irene, can you take a look at the number to see whether you can provide some color?

Sure.

If we look at the reserve for land loans we have about $27 million.

For residential construction loans specifically we have about $70 million.

Okay, that's helpful.

Thank you.

And I want to clarify, that's total, including the general reserve plus any kind of allocated general reserve for the impaired loans.

We do not expect that we would have debt losses coming soon.

The reason is that this reserve includes general factors and -- like for example, even we have quite a few very strongly performing construction or land loan that we have, due to the fact that construction and land is a high-risk loan portfolio today we assign a higher percentage factor to these past loans.

So therefore, what I -- Irene has shared with you is the total reserve that we provide for land and construction loans.

Okay.

Thank you.

Okay.

Your next question is a follow up from the line of Julianna Balicka with KBW.

Please proceed.

Hi, good morning.

Thank you for taking my question again.

Just looking back for your '09 expectations and I know with the TARP Capital there's a lot of moving parts of how you can leverage and deploy it, so I understand that there's no point in thinking about it too precisely, but in terms of your credit expectations, the ones that you gave back over the summer, how are you thinking about that?

The provision cost I believe it was $60 million for '09?

Yes, I think that we still feel pretty comfortable that because that expectation is basically through our pretty detailed analy -- I think that number would not have anything to do with TARP from our standpoint.

Now for many banks I think they may look at that TARP Program is mainly for just doing a kitchen sink in terms of like massive (inaudible) sale or stuff like that but that will be -- that's not in the cards.

From our discussion with our board on the board retreat we have very specific plans (inaudible) deployment of this capital.

And when we look at that credit cost, for 2009 -- and that is based on our understanding of our entire portfolio, and projecting continued deterioration in the market -- and the only thing that would affect that $60 million in total of credit costs for 2009 would be mainly from a major deterioration in the market.

Or the other thing is that, now if there is an acquisition, now, so I want to cushion -- no, make sure that we take out any potential acquisition that will come, because if there is an acquisition, obviously, there will be a different kind of potential adjustment to provision and so forth.

Now, obviously, we have set a notion of if we do get the capital there is a few specific niche lending and deposit initiated that we feel very comfortably that with our expertise that we would do really well at, and because also the illiquid market today that we may potentially be able to take advantage on.

Now in that regard, when those loans start growing to a certain manner obviously we would need to provide the proper general reserve to it.

So again, if you ask if the total number, if we start putting the loan production in the fashion that we expect, based on our strategic position this weekend, then I would expect that, of course, we would have to provide additional provision due to the loan growth.

But I don't think there will be anything above and beyond that.

Very good.

Thank you very much.

Thank you.

Ladies and gentlemen, that concludes the question-and-answer session.

And now I would like to turn the call back to East West Bancorp management for closing remarks.

Thank you, and we look forward to talk to you again in the fourth quarter earnings release, and in the meantime, we're going to go back and start paring down more problem loans.

Good-bye.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.