East West Bancorp Inc (EWBC) 2008 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the MetroCorp Bancshares Inc. fourth quarter 2008 earnings conference call. At this time, all participants are in listen-only mode. (Operator Instructions). As a reminder, this conference is being recorded.

The statements contained in this conference that are not historical facts may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements describe the Company's future plans, projections, strategies, and expectations are based on assumptions and involve a number of risks and uncertainties.

Factors that could cause actual results to differ materially from anticipated or projected results are described under Risk Factors in our 2007 annual report on Form 10-K, and other reports and documents filed by the Company from time to time with the Securities and Exchange Commission.

It is now my pleasure to introduce your host, Mr. George Lee, Chief Executive Officer, MetroCorp Bancshares. Thank you, sir. You may begin.

Good morning, and thank you for joining us today. We're now into the third week of earnings. So by now, you have heard every aspect of economic impact on financial institutions.

Today, I would like to take you through each performance component and provide you with an overview of what we have done to remedy or reduce this effect and how we have strengthened MCBI's future franchise (inaudible). Terry Tangen, our Credit officer, will then follow up with additional details to pull the pieces together to give you a fuller picture of our loan portfolio.

For any company, we believe that its leadership, operating controls, fundamental strategies, and management philosophy should be strong enough to perform at a level to counter any operating environment and stay profitable. For us, 2008 was challenging, but also rewarding. On the one hand, we apologize to you for earnings less than your and our expectations. On the other hand, we have refined our business model in order to enhance our future.

There are a few trends that we are delighted to see. Net interest margin. Interest rate cuts by the Federal Reserve since December 31, 2007, have caused prime rates to drop 4%. And our net interest margins have declined through the entire year 2008. Our net interest margins were 4.3% for the fourth quarter of '07; 4.09% for the first quarter '08; 4% for the second quarter '08; 3.7% for the third quarter '08. And then, a slight uptick to 3.72% for the fourth quarter of 2008.

The declines over 2008, although were relatively minor as compared to our peer banks, perhaps reflecting our solid pricing strategy and balance sheet management. The little uptick between the third and fourth quarter was certainly an encouraging signal that with the Fed rate now at near 0%, floors from our variable-rate loans kicking in and fixed-rate loans staying at about 30% of the consolidated loan portfolio, perhaps we should be seeing some relief from this trend to help out our future earnings.

Non-interest expense. Our total FTE at December 31, 2007 was 349. Our FTE at December 31, 2008 was 320. And at this time, as we speak, it is now 310 -- a reduction of 29 during 2008 and 39, if we were to include the first few weeks this year.

While our total managed assets have grown by $123 million between the same periods, what was encouraging from this is not only in terms of dollars saved, but also a reflection on how we can continue to improve our efficiencies over time by utilizing technology and improved processes.

Other non-interest expenses were slightly higher due to the OTTI impairment charge; higher expenses associated with increased levels of special assets; outside professional fees associated with our restructuring of personnel, and other year-end issues. David Choi, our CFO, should be able to provide you with additional color later on.

Deposits. Total deposits increased by $3.9 million, or 0.3% between the fourth and the third quarter of '08. The amount was not significant, but we are seeing some encouraging mix change. Core deposit increased $34 million while jumbo CDs decreased by $30 million, as a result of perhaps our marketing initiatives and our strong loyal customer base.

There may not be any scientific correlation we can establish right now, but we hope that the trends will continue. And with more data points, we can attribute part of this to the maturing of our relationship profitability models and China initiatives.

We will continue to monitor and study the trends, as one of our primary objectives for 2009 is to improve our loan to deposit ratio, while also improving the quality of our product and deposit mix. We have also adjusted our incentive programs for our business officers as well as key executives, making this a focal point in our business model.

Loans. Our average total loans grew by $235 million or 22% from $1.06 billion at the fourth quarter of 2007 to $1.29 billion at the fourth quarter of 2008. This was achieved with economic conditions in mind. Turning away most new customers or projects we deemed to be slightly above average.

Most of the growth came from the first half of the year, as we consciously slowed down our loan growth during the second half of 2008. The plan going forward is to achieve single digit growth in both markets.

Now, let me touch on the topic of asset quality. I am sure you are all waiting for this. Like I have said in the beginning, I will provide you with our overview and our Chief Credit Officer, Terry Tangen, will give you additional color.

The total non-performing assets increased from $9.1 million at December 31, 2007 by $33.5 million to $42.6 million at December 31, 2008, during one of the most turbulent years in the past century. NPA to total asset went from 0.46% at December 31, 2007 to 2.57% at December 31, 2008. [After] $33.5 million increase, $16 million related to one well-cap collateralized healthcare portfolio, which represented almost half of the NPA increase.

If we were to deduct the $16 million from the $42.6 million, all other NPA in both Texas and California would be $26.6 million, or NPA to total asset ratio of 1.7% -- a pretty acceptable ratio in today's operating environment.

Management's focus during the fourth quarter was on developing individual action plans for each of the non-performing loans, with specific timelines and objectives. Based upon our current estimate, we believe that a healthy percentage of them can be resolved during the first half of 2009 with manageable expenses and reasonable anticipated charge-offs.

In addition to developing specific action plans for the non-performing loans, our Chief Lending Officer, Bert Baker, and Chief Credit Officer, Terry Tangen, along with our business officers, loan review officers, we analyze all of our land/residential construction-related loans and graded them accordingly and conservatively.

We were able to accomplish this because MCBI's total exposure is small as compared to some of our peers. Approximately $11 million in land and $50 million in single family constructions, of which $5 million in residential land and $14 million in residential constructions are in California, and the balance in Texas.

In light of economic outlook for 2009, we have made many grading adjustments, and start to proactively work with the customers to ensure its stability.

Capital level. As of December 31, 2008, our total risk-based capital ratio was 10.3%. Since then, we have received $45 million of hard money on January 16, 2009, bringing our total risk-based capital ratio to 13.3%. With this level of capital, we believe that a single digit loan growth or acquisition can be safely achieved. Otherwise, without the hard money, we may choose not to grow at all, but just develop sufficient business to replenish the paydowns.

Our business model has been fine-tuned and adjusted to reflect the conditions of the economy, but our long-term objectives and business philosophy remain the same. We will still strive to be the premier Asian (inaudible) bank and look for the right opportunity to grow in the markets we serve.

Philosophically, I have asked my colleagues to stay highly and sensitively in tune with the economy, but not to use it as a crutch or excuse to deter from striving to be the best in everything we do. Two cultures came to mind when I'm addressing this point.

First, Vince Lombardi. When he spoke to the Green Bay Packers, in the midst of a blizzard, he asked his players to play above the condition of the weather, but with caution, so as not to drop the ball.

The second was my mentor during my days in Europe, Mr. Jack Rosenfeld, who now lives in Boston. When one day during the early '90s, I was the Group VP, managing four subsidiaries, and the economy was nearly as challenging as it is today. I was informing him how tough the market conditions were. He turned to me and said, George, don't tell me about the birth pains. Just show me a healthy baby. I will never forget that.

And that talk, in times like this, my colleagues and I, instead of belaboring and discussing the economic conditions among ourselves, we are out there working with our customers, learning more about their needs and operating conditions, so that we can help them, as well as ourselves, to safeguard the quality of our business portfolio.

For the entire 22-year history of MetroBank, we have been profitable each year. There is no reason that we can see right now that the 23rd year will be any different. I personally believe that we have a stronger business platform than ever to perform above the stormy clouds and to deliver positive results.

Thank you for joining us today. With this, I'm turning the line to Terry Tangen, our Chief Credit Officer.

Good morning. As George has noted, the economic environment continues to impact performance of the Company's loan portfolio -- NPAs increasing by $13.9 million from third quarter; 6.2 of that in California and approximately 7.7 in the Texas market.

In California, the NPAs continue to be related to the residential market, with four land loans of approximately $3.6 million and two single family homes totaling approximately $2.7 million, moving to non-performing status. In Texas, while the residential market continues to slow, we did have one or two single family homes to one borrower totaling $985,000 moved to non-performing status and then to ORE during the quarter.

Individual borrowers are being affected over a broader range of business. For example, one multifamily property moved to non-performing status and ORE during the quarter. There was one restaurant in the amount of $2.4 million secured with real estate; a $1.5 million loan secured for the retail center; and a $3.1 million commercial land loan moving to non-performing status.

Charge-offs followed a similar path, with $1.6 million of California's $2.5 million in charge-offs related to residential property. The remainder related to five different commercial loans. Texas charge-downs of $900,000 in the quarter related strictly to commercial loans. Debt, year-end 2008, the bank had charged off the charge-offs of $5.5 million totaling 41 basis points related to loans.

I'd like to take you through various segments of the portfolio this time. George had mentioned the residential market in California continues to suffer. Our exposure is $5 million in land and $14 million in residential construction in that market. The land loans have all been reappraised, and those with values below the loan balances have been charged down accordingly, as we noted earlier with the $1.6 million in California.

The non-performing portfolio in California is comprised exclusively of $6.3 million in residential property plus the $3 million hospital property, which is participated from MetroBank. In Texas, residential portfolio consists of approximately $6 million in land and $36 million in construction. Of this, $3.8 million is single family property that is non-performing.

The Bank also has $1.2 million in residential land and ORE. There are four single family homes totaling $400,000 in ORE, and the two previously mentioned townhomes have moved to ORE during the quarter of $985,000.

Overall, builders continue to perform, but sales are certainly slower than prior years. Market values have remained generally stable in the Texas market based on the current appraisals that we're receiving.

As I mentioned earlier, the impact of the declining economy in Texas and California is affecting individual customers, particularly in Texas, rather than particular segments of the market, not including the previously discussed residential segment.

The MPAs in Texas generally consist of the following -- you have the hospital property, $13 million in Texas, plus $3 million in California; various restaurants totaling $3.4 million are non-performing loan status. 3.1 million of those are secured with real estate. Our retail center, $1.5 million -- that's one property. commercial land, $3.1 million -- one property. A veterinary clinic, $1.1 million of one property. And then the previously mentioned $3.8 million in single family. Other miscellaneous credits, none of which is over $200,000 in size, comprise about $2.3 million of non-performing loans. ORE, as I believe I mentioned those, total $4.2 million at the end of the quarter.

One of the things that the Bank does on a periodic basis, at least quarterly, is look at independent information regarding the income-producing property. The banks do have a large portfolio of that, both California and Texas. These reports are prepared for management and the Board using surveys prepared by independent firms. They provide data based on geographic sections of individual markets.

For example, in Texas, the data is specific to groups of zip codes within larger markets, such as Dallas, Houston, San Antonio, and Austin, and then they break those down, for example, into far southwest, near Southwest in the various markets. In California, the data generally relates to the large markets -- Los Angeles, San Francisco, San Diego, and then submarkets within those metro areas.

We have detailed information. In Texas, vacancy rates have held up reasonably well, particularly on the retail side; hotels are doing fairly well. Office has basically remained fairly stable. Most of our markets, at least to date, are not showing significant increases, nor are they showing significant declines, although there are declines in rental rates.

In C&I loans, outsider real estate, the market and the portfolios have been very stable to date. However, as the recession continues, there probably will be some negative impact on these businesses.

Problem resolution -- the Bank has historically utilized the Special Assets Department to manage problem loans. Any loan that's graded substandard is transferred to Special Assets for resolution. That is a requirement; an automatic requirement in the Bank. Appraisals are then ordered and written action plans are prepared. Monthly updates are required and presented to management and the Board.

In the current environment, each account officer is responsible for preparing written action reports on any watchlist loans that we may have designated. These are reviewed by management. We also send them to Special Assets Department to see if they see any that would -- should they require a great change or be moved for their care.

Proactive developments. Current conditions have resulted in certain other actions being taken within the Bank. Portfolio reviews have been conducted with every lender, reviewing all loans over $1 million for indications of potential problems. These are all loans, not just those where we may have a problem.

We have restricted certain loan types. We are not actively looking at residential or land loans. We've limited others -- retail, hotels, based on revising concentration guidelines downward. Weekly management meetings with our Special Assets Group are done to review the status of problem loans and to update or revise action plans as appropriate.

Communication with lenders, the underwriters who support them and other staff, have been issued to redirect their primary efforts towards monitoring and managing existing customers, and expanding business opportunities with those who we know well.

The allowance for loan to lease loss. NDL coverage was at 58% at the end of the year. However, you will also note that 87% or $32.7 million out of the $37.5 million in non-performing loans are secured with real estate and are all supported by current appraisals.

In California, problem areas, specifically residential, have all had new appraisals, including the residential properties and land. In Texas, as noted earlier, while the residential market has deteriorated, values have remained relatively stable, except on occasional specific assets where charge-downs are taken as the appraisals are received. Other problem loans to date are more customer-specific, as I noted earlier, rather than due to segment deterioration.

Each loan is evaluated individually, and reserves and charge-downs taken as necessary. We have increased reserve factors overall for commercial real estate, if you take into account potential deterioration in the portfolio, and we will continue to evaluate month-by-month and quarter-by-quarter, as the economy and the portfolio performance dictate.

Realistically, we expect there will be additions to problem loans. The longer the recession lasts, the more likely some borrowers will reach the tipping point. But not all of these will result in additions to NPAs, nor will they all require charge-downs. We will make progress in reducing existing problem loan levels.

There will be problems. Some will require more work than others, but they all will require time and effort to resolve. We believe we put the process in place to ensure that. Thank you.

Thank you. Operator, we can now take on questions, please.

(Operator Instructions). Brian Klock, KBW.

Good morning, gentlemen. Thank you for the granularity in the press release and going through your prepared comments on credit. Obviously, we're all concerned about that.

Maybe what we can do is, George or Terry, can you update us on the workout on that hospital loan, and what you think maybe the resolution or how that's progressing and what impossible resolution may be in the future.

Yes, Brian, this is Terry. We have filed in Bankruptcy Court to lift the stay on the real estate asset, which comprises $13 million of that loan. We anticipate that that will happen and hopefully, we will have that as an ORE property owned by the Banks by the end of the first quarter. No guarantees. We still -- but that is our -- we anticipate that at this point. And that will then allow us to market that asset.

Sure. Okay. Now, I know the -- on the California land and construction, you mentioned that all those were reappraised. I guess, can you give us an idea maybe where the sort of now current loan to values are, on the California land and the one to four family construction in California, were those maybe based on those new appraisals?

Ryan, this is George. No, the range of California appraisals are actually quite widespread. [Not you] in California, you probably know that. Good areas are probably hasn't dropped at all. And then you have areas where it dropped to $0.15 on the dollar, okay?

In the few -- a couple of pieces of land that we have, I would say we have written down everything during the fourth quarter to the appraised value, which I believe one is about one-third of the original, so it's substantial, and the other one is around 60% or 70%.

Okay.

I maybe give you a little color, Brian. We have -- we're trying to keep these -- we have one, for example, that's running about 65% of one of the larger ones that's on non-performing status. That one jumps out at me immediately. We're trying to keep these not only on non-performing status to cover what it would -- the selling costs, but also to have an additional margin in there as a normal loan to value.

Sure. Okay. And then maybe, just George, maybe general comments on the Texas markets. Maybe not surprising that with the national recession and obviously what the energy prices have done to the Texas economy, first time we're seeing more NPA's coming out of Texas. Maybe you can kind of talk about how the Texas economy is holding up in Houston into Dallas?

What we have done, our type of stress test, okay? Perhaps not a scientific as it should be, but we don't know if the variables are [repeating]. But we sat around with the loan officers, with Bert and everybody else, and just take -- like Terry said, we take each of the portfolios [over $1 billion apart], look at their locations, look at the income flow, look at the strength of the borrower and so forth, and really anticipating that at the best condition, 2009 will be similar to 2008, but if it gets worse. Okay, so this is what we have done to fourth quarter. So some of the gradings and so forth reflect what we anticipate going into the future.

Okay. And then I guess my last question is for David. The other non-interest expense went up about $800,000 from the third quarter. So not including the increased ORE costs and ex the OTTI charges, was there anything non-recurring or some sort of seasonal reason for that increase in the other miscellaneous expense?

Yes. Part of that, you know, the OTTI charge-off, the write-down was about $200,000 higher than the previous quarter. On top of that, we have a little bit higher expenses on the commitments as related to the credit lines, and that was about $390,000.

And legal and professional fees that went up as a result of more resolution on the ORE side, and that's about $250,000; probably tax because of the ORE is about $60,000. And we also have some minor increases on the -- as related to FDIC assessment and some travel expenses also.

And I guess -- [not too much] the FDIC assessment, this will be my last question and I'll jump off. What do think that is going to be 2009 first quarter versus your fourth quarter 2008, knowing that we've got the revised and increased assessments coming here?

Yes. Actually, the increase kicked in starting third quarter and we see the number going -- increasing into fourth quarter also. And it will continue to rise for 2009, and the overall aggregate, we're expecting about 200% to 250% higher than the 2008.

Okay. And what's 2008 coming in at, in dollar amounts?

In dollar amounts, let me see.

If you want to come back to that later in the call, that's fine.

Yes, I have it right in front of me. 2008 -- a total assessment is about $900,000. So 2009 is going to be $2 million something.

Okay. Thanks for taking my call, guys.

Bryce Rowe, Robert W. Baird.

Thanks. Good morning, everybody. Terry, can you tell us what the overall exposure in California is versus Texas on the loan side? And then what the exposure is, if you have it, to retail restaurants, convenience stores, et cetera?

Yes. Texas, around $970 million is the loan portfolio size and 370 --?

370.

-- in California is a rough estimate. Restaurants, well, if you'll hang with me one minute, I'll get that for you. Just kind of a rough basis or approximation, 57% of capital, 7% of loans, for example, in restaurants in the market; 6% in hotels. 13% of loans is in the retail centers. It's a fairly broad mix.

We have set guidelines as related to capital for each category. There's about 20 that we break it down into and try and stay within those. Now, some of those we've reduced over the last year, particularly as I noted in my comments, residential and residential land, where we're certainly limiting that at this time.

Okay. Now would that also imply, do you have commercial construction projects in addition to what you've mentioned here on the residential side?

Yes, we do. We have commercial projects, commercial construction projects about $115 million. And about 30 -- and that's Texas -- about $34 million in California.

Okay. What's the mix of that? Is that a pretty broad mix across office retail, warehouse, et cetera?

Yes, it is. Ant that's the total portfolio, but that mix is fairly broad.

Okay. And George, from an FTE perspective, do you -- obviously you guys have brought down the headcount; not much more here in January. Do you expect that trend to continue? Or are we hitting a floor, so to speak?

Well, what we've testing is not just the number of reductions that we can have. But we're keeping a very strict eye on monitoring the quality of things that will be produced by the same -- that the reduced number of people.

And as you know, during the first quarter, we have examinations by FDIC and OCC in both markets. So I will say that if anything else, this will bring everything to the surface as to what areas we might need more people or can we reduce other people. So we'll be looking at this probably again during the second quarter. And then any impact that we may have, will be the second half.

Okay. And you said the exams are in both California and Texas here in the first quarter of '09?

Yes, they all start -- both starting next week.

Okay. Great. That's helpful. Thank you.

Thank you very much.

David Bishop, Stifel Nicolaus.

Terry, thank you -- echoing Brian's comments for the granularity there. Could you go over through the deterioration in the single family portfolio in Texas, how many credits in there, what are you seeing in terms of those stress levels?

Yes, in the single family in Texas, the $3.8 million I mentioned were basically that are non-performing loans are approximately four borrowers. And those were on our non-performing list prior quarter, so there was no new adds to that, except for the one I mentioned that went into non-performing and then into ORE within the quarter, the (inaudible) of approximately 1 million.

That -- those are the -- those haven't changed. We are certainly watching that portfolio closely. Sales are still being made. We have some builders -- they've certainly slowed in terms of number of sales and number of closings per month.

By the way, which we do monitor that on a monthly basis, with all of our borrowers requiring inventories, just to see where they are. And then do assessments of that, how many months inventory are they working on, how much were they selling, how many are closing. And they seem to be holding up reasonably well.

Income, they're still making income; certainly down, as with many businesses. We're just -- thankfully, we're not seeing significant declines in the values, in terms of median prices or selling prices that have impacted our other borrowers, beyond those we already have on non-performing status.

Okay. So these -- the loans on non-accrual, the $3.8 million, these are finished homes then, residential homes?

Yes. Yes, they are.

Actually occupied by the end user then, so to speak?

That's correct. Well, they're finished -- no. They're finished homes that haven't been sold. About half of that is our two borrowers that are in bankruptcy, so we're stayed at the moment. Others we're pursuing in terms of foreclosure, or we are working with two of the -- one of the borrowers in terms of working through this with them without taking the properties, as they pay down some of the loans, and then continue to -- they're servicing them, even though we have them on non-performing status.

Okay. Great. And I'm sorry, the charge-offs this quarter, the allocation there. Could you walk through that real quick again?

The charge-offs themselves, $2.5 million are our California market. $1.6 million of that was residential property, and the rest were five different commercial loans, some that had been on non-performing status that were charged down.

Texas, we took $900,000 in the quarter. The largest was about $250,000. $284,000, that was the multifamily property that we moved to ORE. We took a $284,000 charge-down before doing that. That was the largest charge-off in Texas in the quarter.

Okay. And then the -- one final question -- the medical property. What gave rise to that problem? Is that anything legislative-related? Or what sort of --?

No, that goes back to the first part of 2008, where the borrowers had -- ran four operating hospitals and were putting -- and put together a plan to renovate a hospital in a market that didn't have one, in the Dallas metro area. It had been a teaching hospital. It had been closed. They came in to renovate, basically rebuild, and ran out of money. And so that went on non-performing status at that time.

Great. Thanks for the color, Terry.

Thank you, David.

Don Worthington, Howe Barnes Hoefer & Arnett.

Good morning. George, you touched on China and I just wanted an update in terms of what's going on with that initiative, in terms of business, and then kind of how you see that going forward.

Well, the good thing about the China offices in Xiamen and [Chungking] is that the expense side is very well-managed. Actually, they're coming in below our expectations. So, in rough numbers, each of the offices cost us roughly about $200,000 to run.

So the exposure there is more. And what -- like, when I was addressing the deposit area, I was thinking that, you know, over time, we will be able to probably put our fingers on why is it that the quality of our deposit mix seems to be improving? Is it because we are using our relationship marketing tools, that we are really bringing in more deposits with the customers we're doing loans with? Or is it because we have customers or clients coming from China, that is coming to us first with their dollar cost deposits?

So, without giving you exact -- an answer, we're seeing more and more of those kinds of things. And I hope that the next time we talk, I'll be able to at least connect two or three points together and talk more about that.

As you know, we only have representative offices in China, so it's not like we're doing business there; but we're certainly building a much wider pool of customers. And that's what we're seeing. So we're very satisfied, yes.

Sounds good. Thank you.

Jordan Hymowitz, Philadelphia Financial.

Couple questions. You said you had 1.7% NPAs if you exclude the hospital. What were the NPAs in Texas versus California?

(multiple speakers) I'm going to have to pull that together for you. I don't have that right in front of me. I apologize.

That's okay. If you wouldn't mind calling me, Terry, anyway. I wanted to have a couple of follow-up questions with you on the Texas data you discussed.

I can do that.

My second question relates to -- the 1.7% NPAs, do you have any guide or forecast or wide range as to what could become charge-offs next year?

Well, all I can say is that in my opening statement, after taking all the pieces apart, we believe that a healthy proportion of that should be worked out at pretty inexpensive price during the first half of 2009.

So, if you're in the fourth quarter, Jordan, I think that the biggest accomplishment, as far as I'm concerned, is that we have a very detailed plan for each of this as well as even anticipating -- anticipation of our problems. So I cannot give you an exact prediction, but we're not too worried about it. And with the provisions that we have put in, I think we should be pretty well covered.

Would a healthy proportion be at least 50%?

That would be very healthy. Meaning that that probably would not -- we should not be -- yes. Well, we should be -- Jordan, we, in a way, look at our earnings for the first three quarters, which I think give us a little room to anticipate things coming up in '09, and basically takes some pretty aggressive or conservative approach to looking at the risk that we have on the books.

Good. And last question, giving your football analogies, do have a view on the Super Bowl?

I have to give you that pick off-line, because I don't want people to steal my picks.

Okay, thank you.

Bryce Rowe, Robert W. Baird.

Sorry to jump back on. David, how do you plan to initially deploy the top funds?

In the short run, immediately we got the funds just two weeks ago, and certainly we just pay down on some of our borrowings. In the short-term, we're looking at just reinvesting in certain securities that will give us a high yield. But in the long run, we're still looking at using the funds for our loan growth and our balance sheet growth, and support our balance sheet growth, going forward.

Okay. Should we expect the securities portfolio to go up by an equal amount of the TARP?

We will be increasing our securities, but the bond market is still in a turmoil, in a way. So we are watching closely as to what we are going to reinvest in. There are some talks about changes on rules on the municipal bonds and so forth, so we're watching them before we jump in. And so, in going forward, yes, there will be some increase in our securities portfolio.

Okay. Thank you.

David Bishop, Stifel Nicolaus.

Yes, one follow-up, Dave, in terms of the net interest margin. Obviously, we had some late period cuts there, but we've got the TARP impact. Any directional sense you guys are forecasting there over the first couple of quarters there in '09?

The TARP didn't really impact the year-end, because we just got the TARP money just in January.

Right.

Interest margin expanded by about 2 basis points, although it's very marginal, but it's still a very good trend for us, because of what the Fed has done in interest rate, a drop in fourth quarter.

The good thing is that a lot of our loans that have floors, they are 99%, 99.5% at the floor rate. So that is providing us a very good support on the loan side. And then for the variable-rate loans that we have, it is already at its bottom for the prime at 3.25%. So I don't see anywhere for it to go.

As for the deposit side, we see that the deposit rate is still relatively high, especially in our local market. And so the only trend that I see is that [it should be] going forward on the deposit cost. And so, to that extent -- and also a couple other things that we are doing on our loan side is that on new loans that we originating in here, we're underwriting then with a floor that is about the current prime plus the spread.

So we're doing everything that we can to protect that interest margin. And hopefully, we will be looking at the net interest margin stabilizing for first quarter. And maybe if everything pans out, then they would make an expense a little bit in here.

Thanks.

David, probably in line with the kind of thought you may have is that what we have done in '08 is really preparing ourselves for '09. You know? If they cannot make -- conditions are more challenging, we can still deliver to our own expectations and economic conditions improve. We have addressed many of the challenges in '08. So, actually, we're pretty bullish about '09.

(Operator Instructions). Jordan Hymowitz, Philadelphia Financial.

Just one more quick follow-up. I mean, you took your reserve off a lot this quarter, if you have your credit quality, to use your words, a healthy proportion work out, do you think your reserve will continue to increase from here? Or kind of stay at this level?

I would say that during the first half of '09, with the mindset of the regulators, we may still continue to pick it up somewhat. But I -- it really depends very much on the macro views of what is expected. But our own asset quality, we feel pretty comfortable.

Got it.

Seeing as there are no further questions, I'd like to turn the call back to management for any concluding remarks.

Well, thank you very much. I'm sure there will be other questions that you may have, and please feel free to call us. Like I said, '08 was really a rewarding year for us, in looking at things in a different light, and we look forward to a very positive 2009. Thank you very much.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation.