East West Bancorp Inc (EWBC) 2009 Q3 法說會逐字稿

Hello and welcome to the East West Bancorp third-quarter 2009 earnings conference call.

(Operator Instructions).

Please note this event is being recorded.

I would now like to turn the conference over to Irene Oh.

Ms.

Oh, the floor is yours, ma'am.

Thank you.

Good morning, everyone, and thank you for joining us to review the financial results of East West Bancorp for the third quarter of 2009.

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 provisions of the Private Securities Litigation Reform Act of 1995.

We wish to caution you that 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 you to our filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2008.

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

I will now turn the call over to Dominic.

Thank you, Irene.

Good morning and thank you for joining us on today's call.

Yesterday afternoon, we reported a net loss of $68.5 million, and the loss was driven by the $159 million of provision for loan losses and the $24 million write-down on our trust preferred securities.

During the quarter, we made great strides in our effort to reduce risk in our loan portfolio.

We believe we are well on our way to getting our credit issues behind us in 2009 and returning to profitability in 2010.

Now, the overall operating environment continues to remain difficult, with a weak economy and unemployment rate still high.

The latest figures show that unemployment in California is still at 12.2% for September, a slight decline from August.

However, for East West, because of our aggressive actions throughout 2008 and 2009 to reduce credit risk and improve our capital position, we actually see many positive signs that the majority of our credit issues are behind us.

Our strategy of managing through this credit cycle was to be aggressive from the outset, taking charge-offs as necessary and disposing of problem loans.

In many instances, we accelerated charge-offs by resolving problem loans quickly and aggressively to remove additional risk today and to reduce any additional deterrents for future profitability.

We believe that our approach of quickly resolving problem loans today as opposed to waiting for the market to improve has slowly worked out these problems, has proven to be a success.

Our strategy for reducing credit risk includes various actions.

These actions include selling loans that are actually performing and current which we believe to have inherent risk.

The $180 million in loans sold during the quarter includes sales of such performing current loans.

Also, of the $204 million in nonaccrual loans as of September 30, $66 million or 32% are actually under 90-day delinquents, while in fact, of the $66 million, $26 million or 40% are not even delinquent and are actually currents and paying as agreed.

We are committed to proactively recognizing problem credits.

Our dedicated focus remains on taking action to get our credit issues behind us in 2009.

One of the primary reasons we believe that our credit issues peaked in the third quarter is that we were able to dramatically reduce our exposure to land and construction loans.

Over the last 21 months, since the start of 2008, we have reduced exposure to land and construction by $2 billion.

Quarter over quarter, we have reduced exposure to land and construction loans by 25% or $355 million.

We sold $206 million in loans in REO during the quarter at about a 29% discount to carrying value, largely in land and construction loans.

Loan delinquency remains low, with 30-to-89-day delinquent loans comprise only 1% of total loans.

And total nonperforming assets are also low at about 1.84% of total assets.

I believe that of the banks that have issued third-quarter earnings so far, our credit metrics [are now set].

Many of our peers had low exposure to problem asset classes at the onset of the downturn.

Today, these same peers have higher exposure to problem asset class, higher delinquencies and higher nonaccrual loans then East West.

One interesting fact is that after our acquisition of Desert Community Bank in late 2007, our construction exposures at that time were highest among our Chinese-American peers.

Now, we are lowest in our construction exposure and also lowest in delinquencies and NPA and nonaccrual.

So we feel pretty confident at this stage right now our credit exposure in substantially better shape than our peers.

Additionally, our allowances for loan losses coverage remains high at 2.74% of total loans.

As of September 30, 2009, the allowance for loan losses is over 100% of both delinquency and nonaccrual loans.

Based on results we have seen in the early part of the fourth quarter, we expect that land and construction loan balances continue to decrease in the fourth quarter of 2009.

Other areas of our loan portfolio are holding up well, and land and construction loans are the only areas of our portfolio that are showing weaknesses.

With the significant reduction in exposure to these loan categories, we will be able to move from our current asset resolution-centric focus to a more normalized banking environment where we can focus on both building new customer relationships and expanding existing ones.

East West will have opportunities to increase market share in the near future.

Going into 2010, many other community banks will still have high levels of nonperforming assets combined with reduced capital levels.

These problems will pose difficulties for them to grow their balance sheets.

Additionally, they will have to increase their focus on problem loans and asset resolution.

As a result, we will have less competition for new business and customers.

This situation poses an opportunity for East West to both grow organically and through potential acquisitions of weaker competitors.

Other metrics that provide us with added confidence about our future are our strong core earnings and profitability, gross -- net interest margin and also controlled expenses.

Core operating earnings totaled $63 million for the third quarter, up $7 million or 12% from second quarter and up over $14 million or 20% from first quarter.

We stated in our earning release that we expect margin will continue to grow in the fourth quarter to 3.35% to 3.4%.

For the quarter, we are also encouraged by our improved efficiency of 40%, down substantially from 55% from the second quarter.

In the earnings release, we added some new tables that provide additional information about the quality of our loan portfolio.

On the third page of the earnings release in the credit quality section, we have added a table that summarizes the composition of our loan portfolio and what the delinquency and nonaccrual loans percentage are for each loan category.

This table clear shows that the problems in our loan portfolio are largely isolated to the land and construction loans.

Nonaccrual loans range from under 1% to about 2% for all loan categories, excluding land and construction loans.

Additionally, total delinquency for all other loan categories also remains low, ranging from under 1% to about 2% for all loan categories.

Specifically, income-producing commercial real estate loans continue to perform well.

As of September 30, 2009, total delinquencies in income-producing commercial real estate loans were only 1.2% of total loans, and nonaccrual loans were only 0.9%.

Further, in our press release we provide additional information on our income-producing commercial real estate portfolio, which comprised 43% of our loan portfolios.

It is important to understand the specifics of our income-producing commercial real estate portfolio and why we believe these loans will prove to be resilient and perform better than other commercial real estate loans that you see in the market.

To begin with, our income-producing commercial real estate portfolio is comprised of seasoned smaller loans with an average loan size of $1.3 million, average original loan to value of 54%, with full personal guarantee from almost all borrowers.

Not only is the average original LTV very low at 54%, 81% of our commercial real estate loans have an original loan to value of 65% or less, and only 3% have original loan to value of 75% or more.

East West commercial real estate loans are well seasoned and were underwritten with longer terms compared to many other banks and financial institutions.

Only 5.5% of these loans are coming due in 2009, and another 6.4% only will come due in 2010.

Generally speaking, we expect that it will be challenging to obtain financing for commercial real estate in the next year, as banks are not actively lending, and also real estate valuations remain low.

However, the refinance risk is low for our commercial real estate loans, as we have single-digit maturities for each of the next two years.

Additionally, due to the original longer term of our commercial real estate loans, these loans that are coming due shortly are well seasoned.

Further, our commercial real estate loans are amortizing loans where the borrowers have continued to make principal payment throughout the loan term.

And as of September 30, 2009, 85% of our income-producing commercial real estate portfolio is variable-rate and are borrowers have benefited from reduced debt service during this low interest rate environment.

The credit quality of the income-producing CRE loans we originate recently in 2009 and [2009] also remains very high.

We did not deviate from our high underwriting standards and maintained our guidelines for low loan to value, high debt coverage ratios, despite recent decrease in real estate valuations.

As of September 30, 2009, we have [210 or 508 million] commercial real estate loans originated in the years of 2008 and 2009, with a weighted average loan to value of 52%, even at today's much-depressed real estate price.

Only 13% of these commercial real estate loans originated in 2008 or 2009 had loan to value of 65% or greater.

We feel confident that these strong characteristics will allow our income-producing commercial real estate portfolio to continue to perform well and better than our other CRE portfolios throughout this economic down cycle.

In summary, we are not positive about the overall economy.

But we are positive about East West.

East West is in a strong position to capitalize on opportunities ahead, with strong levels of capital, strong reserves, a substantial reduction in problem loans, low levels of delinquency and nonaccrual loans, and a proven ability to quickly and efficiently resolve problem credit.

With that, I will now turn the call over to Tom to review our third-quarter results.

Thanks very much, Dominic, and good morning, everyone.

In third quarter, we reported a net loss of $68.5 million, where results were negatively impacted by loan loss provision of $159.2 million, coupled with a $24.2 million noncash charge for other than temporary impairment on our pool trust-preferred securities.

As Dominic mentioned, we have been diligently derisking our balance sheet by reducing our credit risk exposures across all our loan portfolios and aggressively getting after problem credits, resolving them and taking the appropriate charge-offs when shortfalls in values become evident.

In third quarter, we recorded $151.2 million in net charge-offs, which largely drove the heightened provision for loan loss.

For the second quarter in a row, loan delinquencies declined.

Should this indicator continued through fourth quarter, all the more reason why we feel more assured that the worst is over.

Turning to the balance sheet for a moment, throughout this economic cycle we have taken deliberate steps to harden the balance sheet, increase liquidity and reserves, and build capital.

That focus continues today.

In third quarter, we purposely held total assets in check and shrunk the balance sheet modestly by $234 million quarter to quarter.

With core deposits up 9% or $358 million from the second quarter and over $1 billion since December 2008, we took the opportunity to decrease wholesale funding.

This allowed us to both gently delever the balance sheet and help improve our net interest margin.

Throughout 2009, we demonstrated good success in growing core deposits, lessening reliance on high-cost CDs while lowering the cost of deposits.

These important actions are occurring as the focus on our sales efforts were renewed with emphasis placed on attracting new customers and expanding existing customer relationships by offering deposit products and services that offer higher value.

This focus spans all the customer segments we target -- that is retail, small business and middle market.

In third quarter, we added 6863 new -- net new checking and money market accounts, which represented 10% increase in sales versus the number of new checking and money market accounts acquired last quarter.

Year to date, net new checking and money market account growth exceeded 20,000 accounts, which at the same time the average balance of these deposit accounts grew to $25,000 per account, up 17%.

As our efforts to grow strong core deposits continue, we are pleased to note that all our core deposits -- that is DDA, checking, money market and savings accounts -- grew quarter to date.

Core deposit balances all grew in the quarter by $358 million, and increased by $1 billion or 30% since year-end 2008.

At this juncture, we anticipate core deposits will continue to grow and wholesale deposits will lessen, similar to what we observed this quarter.

For these reasons, total deposits as of September 30, 2009, came in $10 million higher than second quarter, while our loan to deposit ratio came in at 97.1%, better than the 98.5% in the second quarter.

For the third consecutive quarter, net interest margin increased, reaching 3.20% in the third quarter, up 22 basis points from 2.98% in the second quarter and up 46 basis points from the 2.74% margin in first quarter 2009.

During this same time, net interest income grew to $95.9 million in third quarter, up 9% from $88.3 million in second quarter and up a full 20% from the $79.7 million in first quarter.

With core deposits increasing, overall cost of funds decreased 24 basis points to 1.88% from 2.12% in the second quarter of '09.

The decrease in the cost of funds was primarily due to lower cost of deposits and was further helped by the paydown of long-term FHLB advances, which we have been doing for most of the year.

During the third quarter, we paid down $250 million in maturing FHLB term advances that carried an interest rate of 5.14% and expect to continue this strategy by paying down $200 million at 4.43% in the fourth quarter of 2009.

In 2009, we anticipate having paid down these borrowings by a total of $630 million or 47% by year end.

These liability management actions, combined with steady yields on interest-earning assets, will provide for further margin expansion in the quarters ahead.

We are confident of this heading into fourth quarter, as the net interest margin for the month of September was 3.32%, 12 basis points higher than the quarter-to-date margin of 3.20%.

Noninterest expenses in the third quarter totaled $46.1 million, a decrease of $11.8 million or 20% from the second quarter of 2009.

Our efficiency ratio in third quarter was 40%, down from 55% last quarter.

This decrease in costs was largely due to lower real estate owned expenses that declined from $8.7 million in the second quarter to $767,000 in the third quarter.

During the third quarter, we recognized a net gain on sale of REOs of $920,000.

We took additional write-downs in REOs of $560,000 and incurred $1.1 million of REO maintenance expenses.

Further adding to the decrease in noninterest expenses was a decrease in FDIC premium of $3.5 million from the prior quarter, which included a special assessment.

If we exclude the impact of REO expenses and the FDIC assessment, noninterest expenses decreased $422,000 in the third quarter compared to prior.

We continue to focus on increasing operating efficiency throughout the organization.

On a final note, I would like to recap the actions we have taken to increase capital during the quarter, specifically tangible common equity.

Quarter to date, we increased tangible common equity by $219 million -- $80 million through a successful common stock offering which closed in July, $28 million through private placement of common stock, and $111 million through the conversion of convertible preferred stock to common stock.

Our capital levels continue to be solid and will be further strengthened as we return to profitability in 2010.

Our Tier 1 risk-based capital ratio is now 13.08%, substantially higher than the well-capitalized regulatory requirement of 6%, while our tangible common equity to risk-weighted asset ratio is a solid 8%.

With that, I will now turn the call over to Dominic.

Thank you, Tom.

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

I will now open the call to questions.

(Operator Instructions).

Ken Zerbe.

First question I had was in terms of the decline in the land and construction loans, could you just tell us how much of that decline was driven specifically by loan sales as well as moving, say, some of the construction loans into more permanent loan types?

And I ask that because the resi mortgage balance seemed to -- has gone up a lot.

I'm just trying to figure out how that is being reduced.

In terms of the reduction of the construction loans, actually it would be a combination of mainly from loan sale and also paydown from borrowers when they find other -- when these condo units are being sold, they found other buyers.

Retail buyers come in and start buying these condo units, and they start paying down.

If you recall in my last conference call a quarter or two ago, I have talked about that more and more of these projects are coming to the finish line, and we expected that in the third and the fourth quarter there will be substantially more paydowns simply because of these construction loans getting completed and moving on.

Now, we did not do that much residential financing for these single-family units such as these condos.

The reason is that our pricing is not as attractive as BofA, Wells Fargo and so forth.

So it is hard for us to compete for that.

The single-family residential mortgage growth are mainly either through our own retail banking origination and also some purchases.

We have done one bulk purchase in the third quarter.

So for that reason, I don't think that there is much material impact at all from something like that.

Our single-family residential mortgage growth really doesn't have much to do with the construction paydown simply because we do not have as attractive of a product in terms of long-term fixed-rate, low interest rate type of mortgages for these condo buyers.

So on the commercial construction area also, as of the last three months, I don't recall that we have any construction loans that got taken out as a permanent [mortgage] in our commercial real estate category.

So mainly, these mortgages pay down when projects finish and is taken out by some other lenders.

Okay, that's perfect.

And then the other question I had was, when you mentioned that your credit issues are going to be behind you by year end, are you trying to implicitly make the statement that you are going to post a profitable quarter in the first quarter of 2010?

I think what we are saying is that the provisioning level will taper off from the peak that we are at today and that we return to profitability in 2010.

First quarter may be a little bit premature, but overall we expect the profitability to come back in 2010.

Probably closer to that midyear mark we see that turn.

Okay.

All right, great.

Thank you.

Joe Morford, RBC Capital Markets.

I guess maybe, Dominic, if you could just talk a bit more about what gives you the confidence to say your credit issues have peaked.

Is it delinquency trends or the inflows to classifieds?

And while you see provisions and charge-offs going down from here, should NPAs go down as well, or will the decrease in construction and land issues be offset by increased commercial real estate problems, where you just don't see a lot of loss content?

First of all, if you look at our loss contents are mainly driven by the land and construction loans.

We went from over $3 billion exposure and now down to $1 billion.

And as we speak, every day, the construction and land portfolio continues to reduce in size.

So by the end of this year, clearly our construction and land portfolio will be substantially reduced to a very, very manageable level, plus the fact that all the write-downs that need to be taken would have already taken place.

Then the question will be on these other loan categories.

Now, everyone was concerned about commercial real estate, income-producing properties, which is the next wave.

But in a way, the next wave started already.

If you look at most of these banks in the country, many of them already experienced high delinquency in commercial real estate loans, including retail, hotels, office buildings, etc., etc.

If you look at our current portfolio, it still stands pretty good in terms of having only 1% -- 1.2% delinquencies and 0.9% nonaccruals.

So we feel pretty good about -- well, I am not saying 2010, that the economy is going to come back.

To me, think it is going to get worse.

But the fact that even as our commercial real estate loans have a little bit more pressure going into 2010, we wouldn't have the kind of massive losses that we had experienced in the construction and land portfolio.

And we feel that the loss content probably will be substantially lower.

And in fact, if you look at the charge-offs that we have taken, we have actually sold many loans and resolved many problem credits that have not even been delinquent.

A good example is what we talk about, the troubled debt restructures.

And some of you include that in our NPA, which I think is probably that's a very distorting figure.

Let me explain to you why.

With $110 million of troubled debt restructured loans, over $100 million of them are the AB notes.

Most of these AB notes in fact have never once been delinquent.

We looked at the real estate value of these notes, and we see that because the real estate values have dropped so much that we went ahead and charged off a portion of the -- we call it B notes, and we charge them off so that we can create the A notes that have a very decent debt coverage ratio, a decent loan to value, and these loans were performing before the loan to value dropped.

These loans were performing after the loan to value dropped.

And these loans are still performing after we charge off the B notes.

Every one of these notes are performing, ever since we created the AB notes.

And come January 1, every one of these notes, over $100 million of them, they are all going to be turned into performing -- I mean out of [TDR again].

So those are all the different factors and characteristics that we see right now.

But by striking some of these loans today, even if they are performing, by causing loans to be nonaccrual when they are still current or within 60 days' delinquency and so forth, and all of that combined I think help us to what I call accelerate the problem resolution.

So come 2010, I do feel that the economy is not going to get much better.

However, our portfolio will be substantially derisked.

And mainly, when these construction and land loans come to a very small, manageable level, it will make it much easier for us to get through the next two years.

And more importantly, having good core profitability, that we keep growing these core earnings, would help us to get to profitability much easier.

And that is the reason why we feel that we think that at this moment, our charge-offs and provision for loan losses have come to peak.

And I am not saying that in fourth quarter we will not also have a pretty sizable charge-off and provision.

We plan to do exactly just that.

However, the likelihood that we are able to do as much like what we have done in the third quarter is not very high, simply because there are only so many loans left for us to keep doing what we have done in the last two quarters.

Okay.

That's helpful.

I had one separate question, was on the acquisition front, are you just interested in Chinese-American banks?

And what about going outside California?

Have you reconsidered your position there at all?

At this moment, I wouldn't think that we would need to think about outside California.

We have made acquisitions outside of the Chinese-American community.

And we actually had a pretty good success in Prime Bank that we acquired in 2001 and were able to retain all the customers and grew the deposits by three- or fourfold.

The Desert Community acquisition was much more challenging.

But we have to keep in mind it was made in late 2007 that came with a big construction and land book.

And on top of that, it is in the high desert area that's currently with an unemployment rate close to 20%.

And so, obviously, that was challenging.

However, we looked at the Desert Community Bank deposit base.

We actually were able to retain the deposits very, very nicely despite the very, very challenged economy.

Now, we pretty much get the problems behind us -- most of the problem loans.

I wouldn't say all of them.

We still have some customers struggling in the high desert area.

But we are in much better shape than we were, obviously, in early 2008.

So we were able to do pretty well in the non-Chinese-American community acquisition.

Now, that being said, the likelihood that we are doing that type of acquisition in 2010 or the next 12 months I would say is somewhat remote.

The reason is that I think there will be opportunity just within the Asian community.

There will be a lot more opportunity in the next 12 months in California within the Asian community.

So therefore, there is really no reason for us to get beyond that.

Now, two to three years from now, whether we will consider looking beyond that, I think that there is always the likelihood.

Okay.

Great.

Thanks, Dominic.

Dave Rochester, FBR Capital Markets.

First, just real quick on the construction and land exposure, you mentioned we will see that decline in the fourth quarter.

Should we expect to see another maybe $200 million or $300 million reduction in the bucket?

It's possible, yes.

I think at this moment right now, the pace that we are going in right now, I think that most likely will be about another $200 million to $300 million.

Where do you anticipate that eventually leveling off over the next few quarters?

It should be -- I mean, that's about it.

I think that once you get to that level, I think that in 2010, if I can encourage our staff to be brave enough to go back out and start making some construction loans -- because one of the issues here is that there is no better loans to make today than construction loans because nobody is doing it.

You can call any terms that you want.

You can be as prudent as you ever wanted to be in terms of loan to value and then the required liquidity, the personal guarantee requirement.

All the sort of things that you can ask for is available because nobody is doing it.

Obviously, we weren't jumping into it because we recognized that we had a pretty large, substantial construction loan book to start with.

And I really didn't want us to have our staff to get confused in terms of when we said that our primary focus is to tear down these toxic assets and we are going to do it as fast as we can and we are going to be as focused as we wanted to be and this is the number one priority, it would be quite confusing if we immediately in the same time start getting them to say, oh, by the way, just go ahead and book these construction loans on the side.

And I think that that may be a little bit confusing to our staff in terms of focus.

But once you get down to that $300 million level out of a loan book of $8.4 billion, $8.5 billion, suddenly, particularly recognizing that these loans are going to be very high quality going forward in the future, and also we are getting a little bit closer to economic recovery, all of that would be reason for us to potentially think about getting into the business again, but with obviously substantial better caution and knowledge about what to do, make sure that we are not making the same mistakes like we used to.

So I think that I don't expect it to go down to zero, let's put it that way.

Got you.

That makes sense.

I also wanted to highlight that in the land loans, you would not expect the kind of dramatic drop like the construction loans, for the following reasons.

The construction loans, we allow many of them to keep building up and up.

Now, while at the last 17 months or so we have been aggressively paring them down, cutting down the unfunded commitments and selling some of the loans and also stop funding of some of these projects, etc., but most of the projects we allow to continue to finish up.

And third quarter is one of these, I think in the end of second quarter and the beginning of third quarter, and now I think going into the fourth quarter also, many of these projects have completed.

And they are in the process of selling their condos project.

They are in the process of selling one condo unit at a time and are paring down these loans.

And so what you see is that construction loans build up to the maximum outstanding balance, and then they just drop off very rapidly loan by loan.

In the land category, it doesn't work that way.

In the land, no matter how we are trying to get rid of them, so we have actually made a lot of replacement of old borrowers to new borrowers.

New borrowers have substantial liquidity who bought these land loans at a substantial discount.

However, there is nobody out in the world making land loans right now.

So when we actually sold some of these land loans, we had -- or maybe we could short pay, etc., etc., we usually still had to provide financing.

So therefore, while we were able to reduce the land loan by either charge-offs, an additional paydown, principal reduction, through workout, etc., etc., the fact is we always, always need to provide some level of financing.

So therefore -- and you wouldn't see a sudden drop-off like a construction, when the projects finish and then they were able to let's say do an auction and then suddenly a $10 million or $12 million project in about two months' time suddenly comes to zero.

We can't -- we won't see that in land loans.

On the other hand, the land loans also have much smaller balances in general.

We don't have these like $12 million, $15 million construction balances, simply because the construction money, when you get to the finish line, they usually tend to be much higher balance.

Land loans just kind of sit there and leveling down by principal paydown one month at a time.

So usually, the balance is much smaller.

So our approach also has been, well, so some of the land loans, if we wait a little bit, we sometimes wait until we foreclose it.

Then we sell it.

On construction loans, we have a lot more [not sell] before it comes to foreclosure.

So land loan, we kind of like tend to wait until the foreclosure comes in and then we sell.

And now by doing this way, what we have done is that we just actively and aggressively charge it down to the most likely selling price instead of just the sales appraisal value, because one of the interesting things we have seen is that this quarter, we actually have a net gain on sale of REO instead of another big laydown, because what we do is that we are trying to write down to the level that we feel that most likely we can sell.

So I think that that is kind of like the summary.

You will see, again, a much bigger reduction in the construction side, still a very healthy reduction in the land balances, but would not be as huge as the construction.

Okay.

Thanks for that.

And on the CRE portfolio, you talked about debt service coverage ratios being supported by the fact that a large part of that portfolio is variable rate.

Can you talk about updated debt service coverage ratios on that portfolio?

I know they used to be or are maybe around 2 times, which is one of the stronger levels in the industry.

Sure.

Obviously, what is happening with real estate and the economy, there are situations where borrowers are having more difficulty and their NOIs are decreasing.

But we find that just kind of with the updated financials that we get from our borrowers, net-net, because so many of then do have the variable-rate loans, that net-net the debt service coverages are substantially different.

Okay, great.

And finally, can you talk about the status of your discussions with the auditors on DTA?

It sounds like those conversations have been going pretty well recently.

Yes, Dave, we at the start of the year we anticipated that because of the credit situations we would be taking some losses this year.

I think the aggressiveness that -- with the aggressive approach that we have taken, aside from getting the credit problem behind us, it's also helping us to return to profitability sooner.

So we have gone about documenting our assumptions on our return to profitability.

We feel very confident that we can do that as we approach the new year.

And at this point in time, there is no reason to believe that the likelihood of the realization of that DTA is not unlikely.

So at this point in time, we have no sense that an allowance needs to be put against that.

In fact, profitability is near at hand.

Okay, great.

Thanks a lot, guys.

Aaron Deer, Sandler O'Neill + Partners.

Can you give a little bit more color on your thoughts with respect to capital?

I am curious to know if you guys would have any intention of doing any additional common equity raise or converting some of the additional preferred shares still outstanding.

And what are your thoughts on repaying TARP and the timing of that?

Well, I think in terms of repaying TARP, our desire is that we want to make sure that we get these credit issues behind us in 2009.

And in 2010, when we start looking at getting this momentum of profitability quarter by quarter, and then I think that will be the time that is appropriate for us to look into paying off TARP.

And clearly, at that point, I would imagine that it will be very appropriate for us to raise additional capital to pay TARP.

In the meantime, I would say that our capital ratio is adequate.

If we anticipate that there will be more opportunities for acquisitions that will be coming in the next quarter or two, then obviously we will be also looking at potentially getting ourselves geared up.

So what I am looking at is from a capital-raising standpoint, it's more or less -- it's not a need for our current balance sheet.

But then, if we raise some additional capital, assuming that the market is still positive, then it may not be a bad idea to raise some, just to gear up to have ample capital for future acquisition.

And in case that the acquisition may not be available, then we always can say there's money for TARP payment eventually anyway.

So I think we are going to be very flexible in that regard.

Okay.

And then I believe you guys are in the midst of or maybe completed your regulatory exam.

I am wondering, have you guys had your exit interview yet or is that done?

Not yet.

Not yet.

Okay.

And then just a technical thing.

The deposit insurance premium, backing out the special charge from the prior quarter, it seems like that was up a bit.

Anything behind that that might have driven that?

We had the special assessment last quarter, Aaron.

And then with the increased deposits and so forth, we saw higher deposit insurance.

But that was about it.

A higher rate, or just a higher overall dollar amount?

We did see a slightly higher rate.

That is true.

Okay.

All right.

Thank you very much.

Lana Chan, BMO Capital Markets.

I was wondering if you could -- if you had the number of the new inflows into nonaccrual loans this quarter.

I think it was about $211 million last quarter?

Would you happen to have that yet for this quarter?

We are a little bit higher than that, Lana, but that is pretty close, close to last year.

Last quarter?

Last quarter, I'm sorry.

And do you have any color about where the inflows are coming from?

Is it still primarily from the residential construction side, or are you seeing more of an increase on the commercial -- commercial real estate side?

Actually both residential and commercial construction, and also land loans.

So I would say that overall, if you look at land and construction loans as still the dominant pools of going to nonaccrual, creating charge-off and causing us for additional provision.

Okay.

And then I guess as you go through your I guess land and construction portfolio now, it's been through a couple of iterations in terms of reassessment.

How much further do you think that there is in terms of new recognition of problems in that portfolio as you are looking at some of the stress points?

Actually, it is not that much of a new recognition of problems.

We identified them pretty much in 2008.

The challenge is that -- and actually, a lot of them have been kind of resolved in 2008 when we first identified these problems and we really worked with borrowers.

They made the appropriate -- like land loans, they made the appropriate substantial principal paydown, or some of them set up a P&I payment and also set up payment reserve and so forth.

But this land value, despite the fact that back then we have reduced the values substantially, but nine, 12, 13 months later they come down even more.

On top of that, when it comes down to truly if we want to get rid of them, the buyers are expecting discount from today's ridiculously low appraised value.

So we're just trying to face to the truth, is that if we do want to get rid of these -- we can always lay down the net current face value and then feel good about it.

But the fact is if we just do that, I think there still is better [margins in there].

And that is why we are going in and start taking these write-downs.

And so I think that most of the problems have been identified in the past, but the severity of these problems have increased and caused us to continue to have to write them down even further.

And the combination of -- we no longer took the 2008 approach.

I mean, if you look at it, it's kind of ironic.

I think that we are more aggressive than most of our peer banks, but I wish I were substantially more aggressive in 2008, because back in 2008 we were aggressive to take the write-downs by doing 100% updated -- I mean, full appraisal reviews, looked at every single one of these loans from a loan review standpoint and then charged them down and provided specific reserves for the purpose of making sure that we got all these problems covered.

But what we didn't do in July and August and September of 2008 was immediately got rid of these loans.

We just thought that if we take all the write-downs and everything is going to be fine, and then we are just going to see how things go, what it turned out was, come 2009, as long as you leave them alone, they continue to create problems.

So I think early 2009, we start getting a little bit more aggressive and accelerate the aggressiveness of resolving these problems once and for all.

So the remaining balances that we have right now, frankly, quite a few of them have been repositioned, sort of like new buyers coming in and now taking over these loans.

So we couldn't say -- we can't say that these are the same characteristics.

It's just reduced exposure.

Actually, in addition to reduced exposure, also the characteristics are quite different too.

But that being said, we still think that there are still inherent risks in there.

And we will continue in the fourth quarter to look at, whether it's C&I loans or commercial real estate loans, whether we can strike before they even go bad.

That is -- a good example is that we have actually sold one CRE loan that is actually paying as agreed, current.

We took a big loss on it because we think that if we let it lingering on, in 2010, sometime in the second half of 2010 that CRE loan may turn out to be just like these construction loans that we experienced in 2008 to 2009.

So we are truly doing this type of strategic reduction, and third quarter, we have done more of these strategic reductions than second quarter.

And fourth quarter, if we didn't have as much land and construction, clear problem assets to write down, that we are going to go and try to find a few of the other categories and make sure we derisk it.

And so that is the combination that we are looking at in the fourth quarter.

So hopefully we can kind of get most of these credit issues behind us.

Okay, Dominic.

Thank you for the update on the strategy.

Appreciate it.

Julianna Balicka, KBW.

(technical difficulty)

We cannot hear you.

So can you maybe -- are you on a speakerphone or something?

No.

But I'm on a bad phone.

So you know what?

Maybe I'll just call back after the call is over.

I apologize.

No, you are okay now.

Now you are okay.

Okay.

You recognized that you sold some of the current performing loans at a discount.

What kind of a discount were you seeing on the performing and still-accruing loans versus the discounts that you saw on the sales of the more problem loans?

It varies.

Every one of them, the thing is because we did not go in and do bulk sales, just like -- actually, we did some small bulk sales on single-family and -- I think single-family.

But because most of these construction, land and commercial real estate loans that we sold are not bulk sale and they are all one by one, it goes from -- all the way from selling it at par all the way to a large discount.

So every one of them are different.

Irene, maybe you can look at the numbers later and then give Julianna a bit more detail.

We will do that, Julianna.

Great.

I appreciate that.

And then on the (technical difficulty) increase, last year at this time you were doing the very thorough portfolio renewal process and reappraisal process.

So obviously new appraisals are now coming up to the one-year mark.

Do you have a plan on renewing them, or how are you looking at that going forward?

We really don't need to go through one-time reappraise, because what happened is that on these construction and land loans, they had very short maturities.

So pretty much -- so first of all, many of them have already been resolved.

And also, pretty much the remaining, whenever they come to maturity, because it's not like that we will sit there and then wait another year or two, because they all have to come due soon anyway.

So we constantly, actually, since July of last year, we constantly get new appraisals for these construction and land loans.

So I think right now, we are in pretty good shape as far as getting more up-to-date information.

Now, obviously, not 100% of them are a snapshot -- as of today, I can tell you that we got all the most fair value.

But I think we have -- a vast majority of them are pretty current.

Secondly, this appraisal value to me is not going to be as crucial anymore because either they are going to be fine, and what we have found is that a lot of our construction loans that we expect them to decline and they turn out to be fine.

Now they're finished, project finished, and they stop selling, and they start reducing their balance one by one.

So -- which is whatever the appraised value is, whatever it is, they are still getting out just right.

And then there are others, even the appraised value looks pretty good, but when they start having difficulties and they cannot move forward, and we decided that we cannot continue to fund interest reserves, and we don't want to have it sit in nonaccrual, we are not selling the note.

We end up taking losses that are higher than the appraised value anyway.

So at this stage right now, I would say that we feel pretty good about, well, we have this exposure kind of contained.

And all the updated value that we -- appraised value we are getting, we continue to go through our methodology to basically provide you the specific reserve or write it down, etc.

But then, when it comes to sell, that we looked at it to see what exactly the kind of losses that we are willing to take and that we get it over with.

The nice thing about it is that we have done so much right now.

I think that after fourth quarter, we probably are not going to be doing much of these [new sales] going into 2010.

Okay.

Thank you very much for the color.

Jeannette Daroosh, JMP Securities.

Thank you for taking my call.

Most of my questions have been asked, so let me just go over just a couple of smaller items.

Given the position that you have taken to clear out all of your problem assets as quickly as possible, I was wondering, the REO expense that we saw in the quarter, is that an anomaly or should we think about the expense being that low also for the fourth quarter?

I think it is hard to make a call on that, depending upon the transactions that we have in the fourth quarter.

This is why we certainly benefited from some gain on sales.

We wouldn't be surprised if that were to repeat.

But at the same time, you don't know until you have the deal closed, and really hard to call on that.

Okay.

Would you say that perhaps the better performance in the third quarter was that investors were coming back off of the sidelines and that perhaps there is a trend that one could look and see from this, or --

I think there is always buyers out there, but it's always going to be like -- there are always buyers as long as you're willing to sell it cheap.

So as long as the price is ridiculous, there are always people who want to buy.

So buyers are always there.

Now, if we look at -- does it look like there are more buyers?

I think so.

But on the other hand, one of my fears that I am pretty sure next year there will be even more buyers, but then I think next year there will be a lot more inventory because most community banks have not even recognized these losses, have not even taken them to the market.

For 2010, most of them have to.

There is no other way around it.

When I look at many of our peer banks, at these 4%, 5% or even 8% to 9% NPAs, it's just not sustainable.

At some point of time, they are going to have to start resolving these problem assets.

And when that happens, the market will be flooded with a lot more inventory.

I think there will be a healthy demand from a buyer standpoint, but also there may be a healthy inventory available.

So what we try to do is get a little bit ahead of the curve.

Now, from the REO expense standpoint, if you look at it, three quarters in a row now, our REO balances have continued to decrease.

It's 38 to 28, coming down, right?

So I think in the fourth quarter, we will try to do the best we can to maybe having even less, but it is at a very, very small level.

So I don't think it's going to be substantially less.

Come 2010, it may be a little bit different strategy.

Once we decided that we will get our exposure down to a level that we are very, very comfortable, we may not be going to use what I call accelerated type of loan sales.

So I am not going to go in in 2010 and start looking at performing loans, recognizing there may be only one more year of hard time, that I am not going to go in and look at all these performing loans and start selling them at like maybe 10%, 20% discount.

The reason I wouldn't want to do that is if I do not think that our overall exposure is going to get much worse, and also the likelihood of a recovery coming in the horizon maybe in 2011, and then it doesn't make sense for us to start selling these loans too quickly with a big discount.

However, what I may do is that once we feel that NPA is still at an acceptable levels, (technical difficulty) acceptable levels, total risk exposure in acceptable levels, we may just sit on some of these -- I shouldn't say we would sit on them -- go through what I call a normal disposition cycle, that is that there may be a higher likelihood we let these loans to go to foreclosure, and after foreclosure we hire a competent real estate broker to help us to dispose of this real estate in the market in a normal pace.

Now, if we start doing that, in that direction, obviously REO may grow.

NPA may grow slightly also, because if everybody out there are sitting on 4% of 5% next year, it doesn't make sense for us to try to ratchet it down to 1%.

We may, as long as we feel comfortable that our overall credit exposure is not high, our most toxic category like land and construction continue to pare down and then start performing in a more decent manner, then I think that letting this NPA go up a little bit is okay, and letting the problem loans that go through the normal cycle of disposition, like coming down to REO and then resell accelerated, it's okay.

So I wanted to share that idea, is that there is no magic or specific direction that these credits have to follow.

Just because we have been aggressive for the last three or four quarters doesn't mean that we have to be doing exactly the same way going forward.

It is all common sense dictates.

So when it comes to 1010, when we start making profit, things are going pretty good, exposure -- our credit exposure in terms of problem credit exposure are down, then we may just kind of riding along.

And at that point, our REO expenses may go up a little bit.

Okay, that's very helpful.

Now, of the sales that you did do in the third quarter, I think you said $206 million is what you sold.

Did you finance any of those, or were they all outright sales for cash?

Combination.

Actually, there were more cash buyers in the third quarter than the second quarter.

However, some of them we feel have to do with financing.

Specifically on the land loan, we obviously have to do financing for these buyers who wouldn't be able -- many of these buyers who bought these land loans to just sit on it for -- in the next four to five years, because they bought it cheap enough.

And so what they do is they set up payment reserve and then they make sure that the loan to value is appropriate, and then they come in and get a loan from us.

Okay.

And then separately, on a different topic, your pool of trust-preferred securities, I think in second quarter you had taken an approximate $101 million impairment charge, and most of that was through the OTI.

I think you have taken a $37 million credit charge through the P&L in the second quarter and now another $24 million in the third quarter.

Given the current economic environment, how should we think about the balance of -- I think it is about $39 million in the OTI account?

Is it likely that this will also eventually be run through the P&L?

Well, I think if there is any good news on these securities, one is, at least from a capital standpoint, we now have these securities written down to about $0.04 on the dollar.

So from a capital perspective, I think we have insulated ourselves from the issue.

From a credit deterioration perspective, this one is a hard thing to call.

I would not be surprised if we see more deferrals default.

On the other hand, you do have a lot of banks that are recapitalizing.

So that is working sort of counter to that.

So it would be -- we will see how this plays through, but we certainly have hit it hard in this year, and we will see, like I say, what happens in the fourth quarter.

It is difficult to forecast this one.

Okay.

All right.

Thank you so much for your time and for your answers.

Joe Gladue, B.

Riley & Co.

I think most of my questions have been answered, but just wondering if you could give us some idea of how much the nonperforming land and development loans have been marked down from their original values.

How much the land and construction loans have been marked down from original values?

Yes, the nonperformers.

Original value, we don't have that, because every quarter we keep marking them down, and we've been marking them down since early 2008.

So at this stage right now, we wouldn't have that number right off the top of our heads.

I think that we can look into that number and then maybe provide to you later on.

Okay, that would be fine.

(Operator Instructions).

Jennifer Demba, SunTrust.

Just wondering, as we look out toward the more normal environment, where do you think your margin can get back to?

Jennifer, I think it is an interesting question.

I think we certainly have great momentum right now in getting the margin up.

And as we hit next year, I am sure we will be around a 3.50% or more level.

I think a lot comes back to also our ability to bring back some new assets or originate some new loans.

That would be further momentum, coupled with the decrease in any reduction in nonaccrual loans -- that is the interest reversal on nonaccrual loans.

To the extent that that decline, that would give us additional lift on the net interest margin.

So I think it is reasonable to think that we can get close to the 4%, maybe by the end of next year, if all things work out.

How much of a drag are the nonaccrual loans right now on the margin?

Probably somewhere around 12 bps or so.

Thank you very much.

(Operator Instructions).

We show no further questions at this time.

I would like to turn the conference back over to management for any closing remarks.

Thank you.

Well, if there are no other questions, I look forward to speaking to all of you come January 2010.

Thank you.

Thank you, sir.

The conference has now concluded.

We thank you for attending today's presentation.

You may now disconnect.