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East West Bancorp Inc. (NASDAQ:EWBC)

Q4 2007 Earnings Call

January 29 2008 11:30 am ET

Executives

Irene Oh - First Vice President

Dominic Ng - Chairman, President and CEO

Julia Gouw - EVP and CFO

Analysts

Joe Morford - RBC Capital Markets

Andrea Jao - Lehman Brothers

Aaron Deer - Sandler O'Neill

Brett Rabatin - FTN Midwest Securities Corp

James Abbott - FBR Capital Markets

Joe Gladue - B. Riley

Erika Penala - Merrill Lynch

Jennifer Demba - SunTrust Robinson Humphrey

Christopher Nolan - Oppenheimer & Company

Chris Stulpin - D.A. Davidson

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2007 East West Bancorp Earnings Call. [Operator Instructions].

I would now like to turn the presentation over to your host for today's call, Ms. Irene Oh, First, the Vice President. Please proceed.

Irene Oh

Good morning, everyone and thank you for joining us to review the financial results of East West Bancorp for the fourth quarter and full year of 2007. In a moment, Dominic Ng, our Chairman, President and Chief Executive Officer, will provide highlights for the quarter. Then Julia Gouw, our Executive Vice President and Chief Financial Officer will review the financial details. 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 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, 2006.

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.

Dominic Ng

Thank you, Irene. Good morning and thank you for joining us on today's call. Yesterday afternoon, we were pleased to announce our 11th consecutive year of record earnings, achieving a record net income and earnings per share.

For the full year 2007, net income increased to a record $161.2 million, or $2.60 per diluted share. This equates to a 12% increase in net income and 11% increase in earnings per share from 2006.

For the fourth quarter, net income totaled $37.2 million or $0.59 per diluted share, or a 6% decrease in earnings per share from the fourth quarter of 2006. Julia will provide a summary of our performance for the fourth quarter shortly. But first, I would like to provide my perspective on the current economic environment and the impact on our portfolio, our initial outlook for 2008, and a brief update on Desert Community Bank.

2007 ended as a year of unprecedented challenges for the entire banking industry. Since our October conference call to discuss third quarter 2007 earnings, East West has been mostly affected by the economic and real estate slowdown that has impacted all of our peers. With the current economic conditions and the downturn in the housing market, credit quality is an area of heightened focus.

Overall, we feel that our asset quality is stronger than our peers, and we believe that any potential future charge-offs will be at a manageable level. Although we are confident that we will be able to weather the downturn in the market, the current economic conditions have impacted a small number of our loans. As a result, during the fourth quarter, we increased our loan loss provision to $9 million, resulting in a build-up of the reserve for loan losses to total loans ratio of 1% as of year end 2007.

Non-performing assets were 57 basis points of average loans at December 31, 2007, and for the quarter, net charge-offs rose to 24 basis points on average loans, or $5.2 million. This was compared to a net recovery of 4 basis points of average loans, or $875,000 in the fourth quarter of 2006.

The net charge-offs during the fourth quarter primarily resulted from one residential construction loan and one commercial loan. With the disruption in the financial markets, the decline in real estate markets, and increasing concerns about a potential recession, it appears that credit concerns will continue into 2008. East West is gearing up and prepares to meet these future challenges.

As we mentioned during our conference call in October, we have methodically reviewed our loan portfolio for potential weaknesses, particularly in our residential construction portfolio. Loan-by-loan we have reviewed our credits, specifically focusing on construction, land and C&I loans. This resulted in a review of approximately 80% of our loan portfolio.

Overall, we believe that our loan portfolio is sound. However, we recognize that in a down-market, deterioration can happen at an increased pace and we will continue to originally monitor and review our loan portfolio.

We believe, the key to minimizing the financial effects of a downturn is the early identification of problem loans, and the aggressive resolution of such loans. During the fourth quarter, we redirected the efforts of some of our more experienced real estate lenders to focus on a resolution of problem assets and provided workout strategies for our customers.

Based on our analysis of our loan portfolio, credit quality, and overall economic conditions, we believe that the December 31, 2007 allowance for loan losses to total loan ratio of 1% is at appropriate levels. We believe that it's only prudent, given the uncertain economic conditions, to increase the provision for loan losses and build a reserve for loan losses during 2008. The provision for loan losses will be $24 million as of full year 2008. With that said, we believe that East West Bank is uniquely positioned among its peer community banks.

Since 1993, East West net charge-off to average loans ratio has averaged only 18 basis points a year. During the same 15-year period, the average net charge-off to average loans ratio experienced by other commercial banks in the United States totaled [70] basis point a year. The East West charge-off rate has been significantly below the industry average for all, but one of the last in 15 years. Year-after-year in both good and challenging credit conditions, East West performed well. Heading into 2008, we expect to continue to outperform our peers, and deliver strong financial results for our shareholders.

I would also like to reinforce that East West has a longstanding tradition of not making budgetary loans. We have never made any subprime loans, and do not have any subprime loans, securities or warehouse loans to subprime mortgage bankers. Given the current economic situation, we believe that our overall level of asset quality remains sound. A longstanding guidance has been that the net charge-off should remain below 35 basis points. At this point, we continue to believe that the net charge-off should remain below the 35 basis point threshold in 2008.

The management team at East West has a wealth of experience from our years of banking. The current management team was intact at East West during the last real estate economic downturn in the early 1990s. Since that time, East West has never had any regulatory issues, and has posted a net profit each and every year. We came away from the last real estate downturn virtually unscathed and have no reason to believe that this downturn will be any different.

We have delivered a proven track-record of performing well in all economic conditions, and believe that we are well-positioned to handle the current credit challenges.

I would now like to shift gears and discuss our expectations for earnings in 2008. Given the uncertainties surrounding the economy, we do not expect 2008 to be a year of earnings expansion. We currently estimate that earnings per share for the full year 2008 will decrease approximately 20% of 2007, and be in the range of $2.05 to $2.10. This guidance is based on projections of loan growth of 3%, deposit growth of 5% and a further decrease in the Fed fund rate of 25 basis points, resulting in a net interest margin of 3.6% to 3.7%.

Additionally, in light of the challenging economic conditions, we believe that it is only prudent to grow our allowance for loan losses, and expect to increase provisions for loan losses to $24 million for the full year of 2008.

As a final note, I would like to provide an update on Desert Community Bank, which we acquired last August. In November 2007, we successfully completed the integration of Desert Community Bank through the system conversion. I am pleased to report that the loan and deposit balance at Desert Community Bank has held up well since the acquisition. Looking ahead to 2008, we anticipate deposit growth from the Desert Community Bank branches as they now have the capability to offer customers in the high desert, a wide range of products. The current weakness in the market has resulted in an increase in delinquencies from the loans acquired from Desert Community. However, given the regional and overall economic environment, the credit issues resulting from Desert Community Bank loans remain relatively benign.

I will now turn the call over to Julia, who will discuss in more depth the results of fourth quarter of 2007.

Julia Gouw

Thank you, Dominic. I will provide a summary on the financial results of the fourth quarter of 2007. This release contains a detailed discussion of the financial results for the quarter, so I will focus on key areas.

As of December 31, 2007 East West reached $11.9 billion in total assets, an increase of 10% from December 31, 2006. During the year, we originated a total of $4.5 billion in loans, resulting in gross loans of $8.8 billion as of December 31, 2007. Organic loan growth, excluding the impact of $1.2 billion in residential securitization and the acquisition of Desert Community Bank, was 16% for the year.

Yesterday we reported fourth quarter earnings per share of $0.59, a decrease of $0.04 per share from the prior year period, and a decrease of $0.08 per share from the previous quarter. We are pleased to report that our margin remained relatively stable during the fourth quarter. Our net interest margin for the quarter equaled 3.91%, a 10 basis point increase from the year-ago margin of 3.81%, and a 4 basis point decrease from the prior quarter margin of 3.95%.

For the fourth quarter of 2007, the average volume of earnings asset was a record $10.9 billion, and the yield was 7.37%, an increase in average volume of $741 million, and an increase in yield of 8 basis points from the prior year period. The average cost of deposits was 3.15% for the quarter, a decrease of 12 basis points from the year-ago quarter, and a decrease of 20 basis points from the prior quarter. Some of our peers experienced significant contraction in net interest margin during the fourth quarter. We have and we will continue to price our loans and deposits at competitive rates, but will also ensure strong profitability for the bank.

Currently we estimate that our net interest margin will range from 3.6% to 3.7% for the full year of 2008. This estimate includes the assumption that the Fed fund rates will decrease another 25 basis points. As Dominic has spoken extensively about our credit quality and the allowance for loan losses and provisional levels for 2008, I’d like to briefly touch upon the status of the delinquent loans, and also the competition of non-performing loans as of December 31, 2007.

As of December 31, 2007, loans delinquent 30 to 59 days totalled $41.4 million, down from $118.3 million as of September 30, 2007. Loans delinquent 60 to 89 days totaled $21.2 million, up slightly from $18.2 million as of September 30, 2007. And finally, loans delinquent 90 days or greater totaled $63.9 million as of December 31, 2007, compared to $42.8 million a quarter ago.

Total delinquent loans as a percentage of gross loans totaled 1.42% as of December 31, 2007. Total delinquent construction loans, as of percentage of total construction loans, was 3.05% as of December 31, 2007. We continue to exercise a lower level of delinquencies for commercial real estate, C&I and trade finance and single-family and multi-family residential loans.

As of December 31, 2007, we have $67.5 million in non-performing assets comprised of $63.9 million in non-performing loans, $2.1 million in modified loans and $1.5 million in REO assets. Non-performing assets as of December 31, 2007 were comprised of nine single-family loans totaling $4.5 million, 6 multi-family loans totaling $9.6 million, 7 commercial real estate loans totaling $15.5 million, 7 construction loans totaling $31.7 million, 8 commercial business loans totaling $1.6 million and 7 consumer loans totaling $939,000.

The $15.5 million in non-performing commercial real estate loans, as of December 31, 2007, was primarily due to one $11.1 million of land loans located in Los Angeles, California.

I am pleased to report that earlier this month we sold this $11.1 million note at positive [par] plus accrued interest. In the last few months, we sold 4 problem loans with a total balance of $26 million at a minimal loss of 500,000. For all our problem loans, we are active and aggressive in managing and resolving issues.

Our loan portfolio is largely tied to variable indices. At December 31, 2007, 56% of our loan portfolio re-priced immediately, 17% re-prices within one year, and 9% is tied to intermediate index between one and three years. Non-interest income for the fourth quarter totaled 14 million, 51% higher than the year ago level of $9.3 million.

Excluding the impact of gain on sales of investment securities and other assets, core non-interest income grew nicely, totaling $11.3 million for the quarter or 21% increase from the prior year. Based on our initial analysis, we believe that core non-interest income for the full year of 2008 will remain comparable to the 2007 level.

Non-interest expense was $52.3 million for the fourth quarter, an increase of 17% or $7.7 million from the prior year amount. The increase from the prior year is largely as a result of increases in both compensation and occupancy expenses, resulting from the acquisition of Desert Community Bank, which closed in August of last year and also the organic growth the bank has experienced.

In 2008, we anticipate that non-interest expense will increase approximately 18%. Our loan portfolio continues to remain well-diversified and secured. Portfolio characteristics as of December 31, 2007 include commercial real estate loans as of December 31, 2007 at an average balance of $1.3 million, an average loan-to-value of 55%, and an average seasoning of 2.5 years.

Multi-family loans had an average balance of $701,000, an average loan-to-value of 62%, and average seasoning of 2.2 years. Constructions loans had an average balance of $2.6 million, average loan-to-value of 69%, and average seasoning of 1.5 years.

Finally, single-family loans had an average balance of $415,000, average loan-to-value of 58%, and average seasoning of 1.5 years.

I will now turn the call back over to Dominic.

Dominic Ng

Thank you, Julia. Thank you everyone, for joining the call today and I would now open the call to questions.

Question-and-Answer Session

Operator

(Operator instructions) And your first question comes from the line of Joe Morford of RBC Capital Markets

Joe Morford - RBC Capital Markets

Thanks. Good morning.

Julia Gouw

Good morning.

Joe Morford - RBC Capital Markets

I had two questions. First, I guess if you could, maybe Julia give us a better color of what the inflows and outflows into the NPA category were in the fourth quarter?

Julia Gouw

The outflows we resolved to construction loans that's, part of the note that we sold at no losses. We are selling about $7 million, this is the primary and then well we had a large about 50 million loans in San Francisco that got resolved.

Joe Morford - RBC Capital Markets

Okay. And then the new stuff that came in this quarter?

Julia Gouw

Would be to $11.1 million that we got resolved.

Joe Morford - RBC Capital Markets

Okay.

Julia Gouw

And a couple of construction loans, mostly in the Empire.

Joe Morford - RBC Capital Markets

Okay. And then the other question is, I guess on the expense front, recognizing the math of adding in the Desert Community cost and the higher FDIC premiums. But, I guess I still don't quite understand how in this current operating environment, you can't limit your expense growth to less than 18%, especially when the fourth quarter seem to bit outside. So could you maybe give us a little more color on where is the upward pressure coming from here?

Julia Gouw

Before commenting, I just want to make sure that 18% is year-to-year.

Joe Morford - RBC Capital Markets

Right.

Julia Gouw

Now, like the over the fourth quarter.

Joe Morford - RBC Capital Markets

Right.

Julia Gouw

Okay.

Dominic Ng

Well I think that, if expense is something that is very easy to control, if we do need to make it, if we need to hold down the cost, it’s not going to be that challenging to do that. I think what we looked at, is at with this very certain environment, occasionally opportunity comes along that is at when things get much a worse. There are banks that unraveled and they have opportunities for us to acquire talents from other banks. And these are the opportunities sometimes that if you don’t take advantage of it, it may not come along to many years to come, because you can’t just go out to people at the best of time when everybody wants them. But if you are trying to do that in a more difficult environment, in fact often times is more likely that, we will be able to achieve the opportunity which you gain ground on recruiting the right talents that will be beneficial for us for many years to come.

Now so if that happens, we'd love to have the sort of expenses available or resources available. Would you be able to do that now? If we were now taking massive losses, obliviously we will not be prudent. Our 2008 guidance, even 20% less than what we expected from this year based on the current projection, and frankly as an earnings number, out performed most of our peers anyway. So at that standpoint, I think it would be foolish for us not to set aside some potential money for that purpose, that’s one.

Secondly, again it's an uncertain environment. We don’t really where it's going to go. But in our last recession in the early 90’s in California, I recall that while we were able to have much less charge-off than most of our peers in the banking community in California, clearly there were more legal expenses, REO expenses. We have to make sure to get receiver for property managers. We have to occasionally sue the borrowers in order to perfect our guarantee. And those are the type of expenses, which frankly for many years now, we have very, very little expense in this regard. So historically, East West legal expenses and REO expenses are very similar like our charge-off and probation, which is very minimal.

So when we looked at -- probation on charge-off jumped quite a bit in the fourth quarter. Frankly, if you look at that number, most banks would say that they would love to have that just as a normal year. So our legal expenses that we are setting aside for 2008, we'll probably deny for some of the other banks, but for us, compared by historical law, we feel that it is only prudent for 2008 to set aside a bit more money for that.

So, it's all very much of a prudent, conservative, accrual that we expect maybe likely that would happen, and that's what we set aside. Hopefully, we don’t have to spend a lot on legal expenses. And we may not find any talents, and in that point, it is most likely we will come much lower in terms of expense numbers than what we projected.

Joe Morford - RBC Capital Markets

Okay. That certainly helps a lot. Thanks Dominic.

Dominic Ng

You are welcome.

Operator

Your next question comes from the line of Andrea Jao of Lehman Brothers.

Andrea Jao - Lehman Brothers

Good morning, everyone.

Dominic Ng

Good morning.

Andrea Jao - Lehman Brothers

First question is on how you think credit will progress over the course of the year. Do you expect it to be difficult over the whole of 2008, or will the first half of the year be more difficult or probably you will be cautious all the way till the start of '09?

Dominic Ng

Well, first I would like to qualify with our economist. So, we are just bankers. We execute pretty good on a year-in year-out basis. So, projection is not something that I will call our expertise. But, if you look our performance for the last 11 years, our record earnings, in fact I've been here in East West for 16 years, every year we make pretty good money versus other banks. So, we are confident that we will do better than other banks.

What we don’t know is what the economy is going to be like and we are going to be extra cautious to prepare for the worst. And at this stage, we really do not have a very good CEO, whether the economy is going to go much further south or everything is going to be fine. I think had lot -- all these elements has a lot to do with what the -- both the global economy and also, what the US government is going to do, in terms of potential to housing.

And, if some of this stimuli that’s been put together, actually worked and I think that housing turned around, everything is going to be fine. But if housing continues to go south and if real estate, the home prices continue to go south, throughout the United States down another 15%, or 20%, I think clearly that will be, without a doubt, having a recession. And at that point, how the government reacts to it will make a difference. And I would say that we wouldn't be comfortable to comment what exactly is going to happen in the future.

Andrea Jao - Lehman Brothers

Okay. Fair enough. Well, in terms of Capital Management it isn't like you are very, very seen the capitalized and I get the sense that you will not be growing your balance sheet. Is this the right way to look at it? And do you feel that there is available room to buyback shares over the course of '08?

Dominic Ng

I think yes, we are not planning to grow much of our balance sheet and yes, our capital is going to have to actually grow and it's going to have some cushion. And no, we are not planning to buyback stock, because this is not the time of the year. In fact, if you are following my previous comment, we are not economist and, we cannot predict what the economy is going to go, one way or the other. I think this is the time that we feel that preservation of capital is key, and frankly, if we want to grow long we can grow double-digit easily, which we have done year in, year out.

We decided that it is now prudent in this kind of economic condition to not hold back and to take a look at what's going to happen in the economy. And, if we are not missing six months of quick earning or better earnings, yeah, we should grow, because the economy isn't that bad after all. I think that is something that we will be happy to leave it on a table. Just to make sure that we do not make any critical mistake in these kind of very unpredictable and challenging economic conditions.

Andrea Jao - Lehman Brothers

Okay. But do you have the need to raise hybrid capital at all?

Julia Gouw.

No.

Dominic Ng

Our earnings will be more inadequate, that we see right now, that we will be able to take care of the capital that we want to preserve.

Julia Gouw.

If we do not roll our asset, more than 15%, we will be accumulating capital. So, for 2008, most likely what we are doing would continue to build up the capital. We have very strong tangible capital. What, like we don’t have to pay excessive, capital is total risk based capital, but that won’t go in 2008.

Andrea Jao - Lehman Brothers

Okay. Perfect, thank you so much.

Dominic Ng

Thank you.

Operator

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

Aaron Deer - Sandler O'Neill

Hi good morning Dominic, good morning Julia.

Dominic Ng

Good morning.

Julia Gouw

Good morning.

Aaron Deer - Sandler O'Neill

A question on the deposits; how aggressive have you been able to be on lowering your deposits cost? Obliviously, they were down some in the fourth quarter and I am wondering what you have done since, maybe if you can give us the spot rate where deposits cost that at year end?

Julia Gouw

We, in the early part of October, were reducing the rate across the board and that’s why our net interest margin was able to hold up very well. And for the rest of the fourth quarter, we did not reduce as much as the Fed reduce the rate, but like a given that the Fed reduced 75 basis points and then everything LIBOR and everything goes down dramatically. We lowered our CD rates across the board and the money market accounts. So right now we are offering the CDs between 3% to 3.5%. So, in time when the CDs reprice they will lower our cost of price.

Aaron Deer - Sandler O'Neill

Right, okay. And then you mentioned that with respect to non-interest income you said that the -- in 2008, I think you expect it to be comparable with what you saw in the fourth quarter, which I guess on a core basis, would have 11.3 million. So that's a good consistent run rate throughout the year, is that correct?

Julia Gouw

Yes.

Aaron Deer - Sandler O'Neill

Okay.

Julia Gouw

For the core non-interest income.

Aaron Deer - Sandler O'Neill

Right. Thank you.

Julia Gouw

Thank you.

Operator

Your next question comes from the line of Brett Rabatin of FTN Midwest.

Brett Rabatin - FTN Midwest Securities Corp

Good morning, Dominic. Good morning, Julia.

Dominic Ng

Good morning

Julia Gouw

Good morning.

Brett Rabatin - FTN Midwest Securities Corp

You guys seem pretty conservative and I felt City National is not a company that seemed pretty conservative on just economic activity and what's going on. I was curious first, if you are seeing any downturn in the housing impacting other areas of the economy from the perspective of your customers or any other, risk migration, other than basically related to land and construction.

Dominic Ng

At this stage, we have not seen much signs of -- you have some of these isolated incidents like for example because of the Hollywood writers' strike. That may affect a certain pocket of industries. That’s a sort of service to that entertainment area. But, if you look at the overall Southern California or California economy, we really have not seen much slowdown. If you look at the consumer report, the retailer’s report, it really is not gloom and doom at all, and is actually holding up okay.

So, at this stage right now, everything is just fine and dandy. So, that’s why it’s very difficult for us to predict what would happen, because if you hear about these massive write-offs from the big homebuilders and these big financial institutions who provide loans to these big homebuilders and things like that, it looks pretty scary out there, when you start seeing those numbers.

Brett Rabatin - FTN Midwest Securities Corp

Yes.

Dominic Ng

But then, when you look at the service industry overall, we haven’t seen much of a bad time. But that’s the kind of time that we need to be cautious, because it’s not like it’s already gotten so bad. There is only one place to go, up and so that’s why right now, we are paying more attention to C&I loans than the real estate loans, simply because of the fact that, if things are going to go much worse and we get into a recession, that has a overall impact to the entire economy. The C&I loans are going to be taking a lot of charge-off, simply because those we don’t have a loan to value of 55% or 60%.

So, in that standpoint, I think that that’s why we are taking a much more precautionary type of stand in terms of making sure that we do not get aggressive out there and trying to be the hero at the inappropriate time.

Brett Rabatin - FTN Midwest Securities Corp

Okay. That’s a fair color. And then secondly, I don’t know if you want to give this number but, it helps sometimes anyway, banks where there is exposure to land and real estate, one of the numbers I can give out is, what classified asset levels are, or special mention loans and just talk about the other numbers besides what's non-accrual in past day, I didn't know if you guys wanted to disclose any of those numbers?

Julia Gouw

The classified assets have been going up, obviously when you reviewed the loans given to current economic conditions. So, as of September, the classified asset is about $150 million. It went up to about $250 million as of 12/31 and that is one of the drivers of the increased provision for the fourth quarter of 2007. So the trend is increasing and that's why we have to continue to monitor those loans.

But as Dominic mentioned, we feel that for the real estate collateralized loans whether it’s construction or land loans because of the lower LTV that we have the likelihood of massive charge-off, is really not high at all. The likelihood is that we will have some charge-off from construction and land loans, but it would be pretty manageable, but the one that we really don't know is the C&I loans, because when C&I loans go back, the charge-off as a percentage of loans tend to be much, much larger than the real estate loans.

Dominic Ng

And this is based on experience that we had in the early 90s. In fact, it was a real estate recession in California in the early 90s from '92 to '95. But if you look at banks, it was mainly that it was the C&I charge-off that have taken a lot of banks under or caused a lot of banks to be under cease and desist.

And while real estate also has taken a big toll for these banks who have high LTV, but interestingly enough when the recession hit, it was a lot of C&I loans that went bad. So that's why we want you to look at the numbers very carefully.

Now, and I want expand what you just said earlier, the likelihood of charge-off to be very high for these real-estate loans is low. However, the likelihood of non-performing asset going up can be high if the real-estate market continues to stay where it is right now and continues to have homes not being sold, there will be a higher likelihood of non-performing assets to keep popping up because -- or it takes aside a $5 million construction loan that not being sold and the entire balance become outstanding.

And the borrower will be trying to figure out what they want to do, and next thing happens, 90 days gone by and they have not sold anything yet. They refuse to off the price when they have the cushion to drop the price. They refuse to drop the price and it may be 120, 180 days later, they have not got it resolved and that would cause non-performing assets to go up. But that doesn't mean that they will actually have much charge-off, and what we found is that occasionally, what we do is, it’s a waiting and waiting for the borrower to decide which is -- there are few of these loans we just sold them at par, or maybe we just have to foreclose and then sell it on our own and then to get full recovery.

So, we may not have as much charge-off from the construction loans, but I think that if things get bad we may have, we may pawed up a bunch of non-performing assets just because of the fact that we have no controls sometimes on -- customer behaviors is about what's the fair price in terms of selling the homes.

Julia Gouw

Also I think that this time around there is an advantage that the problems are in the residential construction versus commercial. So what happened is that most of the borrowers, if they have liquidity, if they cannot sell the homes or condos, will not walk away from the property. But the rental market is very strong only because we have a very low vacancy, a lot of these buildings or condos or homes can be rented out very, very easily. So what some of the borrowers do is that they convert that and they rent them out and if they have enough cash flow to service the debt, the loans will not be delinquent. So I think that a lot of different variations occur, but the fact is that most of the borrowers that can hang on to the property will not walk away. If they can service the debt to some degree, help to resolve or to not have losses on these loans.

Brett Rabatin - FTN Midwest Securities Corp

Okay, thanks for all the color, Julia and Dominic.

Dominic Ng

Thank you.

Julia Gouw

Thank you.

Operator

The next question comes from the line of James Abbott of FBR Capital Markets.

James Abbott - FBR Capital Markets

Hey, good morning.

Dominic Ng

Good morning.

James Abbott - FBR Capital Market

I have got a few questions here actually. I was wondering if you could give us a sense for the margin for first quarter of '08, if you have an estimated range? I am coming up with something that's down between 20 basis points and 30 basis points. Is that a reasonable range to assume?

Julia Gouw

Yeah, we think that first quarter probably like also between 360 to 370.

James Abbott - FBR Capital Market

Okay. And then, I'll make sure that I get started off on the right foot on model anyway. On the net charge offs and Dominic, you may have been trying to get at this early in your comment, so I apologize if I am asking you to repeat something. But were there any lumpy net charge-offs in there that you wouldn't foresee happening again? In other words, there were 24 basis points in that charge-off; is there something we should be backing out due to fraud or something that's completely out of left deal, so to speak?

Julia Gouw

Well net charge-off, it really is hard to say whether it's recurring non-recurring. It will come well whatever that the loams during that quarter.

James Abbott - FBR Capital Market

Okay. So, alright, I just wanted to understand there wasn't a fraud or a loan that had a really high LTV that went through the process, atypical. Another question that I had is on the -- Julia, you gave some very good statistics on the non-performing assets by loan type and how many loans, what the dollar amount was, did you do the same thing for the third quarter? Do you have those stats with you there?

Julia Gouw

I don't have it with me.

James Abbott - FBR Capital Market

Okay. Maybe we can circle back off-line, I thought that was interesting and helpful.. And then, the reserve-to-loan ratio, can you remind us how that's calculated? Everybody does that a little differently, but it’s formulated, I am sure. And what should we be looking for in order for that ratio to go above a 100 basis points? In other words, in order to go from a 100 to 110, what needs to happen?

Julia Gouw

Well, the ratio is based upon a formula, so the three main reasons would be the loan growth, the classified assets and the mix of the loans that we have in the portfolio because different loans have different ratio. So, those are three major components that we just have to evaluate based upon the historical charge-off and the current economic conditions and apply loss ratio to those loans.

James Abbott - FBR Capital Market

Okay. And I know this is a hard question to answer, but from the -- lets assume the loan growth is fairly flat was a sort of where you're suggesting and then the mix of loans doesn't change substantially, which I think you've also suggested. What would the classified loans need to go? You are at 250 right now, if it went to 350, would that be enough to do 10 basis points or --?

Julia Gouw

I don't have that number. That also really depends on what type of classified assets we have and what kind of charge-offs we have.

James Abbott - FBR Capital Market

Okay. And on the 3% to 3.5% rate on CD's, and this is my last question. Would you classify that in your markets? Is that the high end of the range, the middle of the pack, the low end of the range, where are you in terms of competitive pricing?

Julia Gouw

Well, I think the rates out there are having very wide range. Some banks that really need funding continue to pay up for the rates but there are lot of banks that are not in desperate need of funding and do not offer that kind of rates. So I think that it's more in the middle of the pack. But the range is very wide right now.

James Abbott - FBR Capital Market

So you are not seeing a lot of outflows, but not a lot of inflows either then?

Julia Gouw

Correct.

James Abbott - FBR Capital Market

Okay. Thank you very much. Thanks to both of you.

Julia Gouw

Thanks.

Dominic Ng

Thank you.

Operator

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

Joe Gladue - B. Riley

Hi. I guess I will follow-up on that question a little bit. You've given us a good idea on the loan side, how the cuts in Fed interest rates are affecting the yields. But can you give us an idea on the funding side, how much of CDs, what the average maturity of CDs is? And if there is any big chunk repricing this quarter or second quarter? And just how that, the funding cost, will change due to the Fed cuts?

Julia Gouw

No, our average life of the CD is very short because most people do not want to put on the long-term CD. So I would say average of about six months, not anything really large in particular but within in six months most of CDs will mature and be priced to the current price.

Joe Gladue - B. Riley

Okay. And maybe if you could just give us a little color with your guidance on loan growth of about 1% for the year, on where you expect some growth to continue in the portfolio and what categories of loans you expect to be contracting for the year?

Dominic Ng

It's actually 3% growth.

Joe Gladue - B. Riley

Oh, I'm sorry.

Dominic Ng

Basically, we expect that there will be a slower payoff coming from our exiting borrowers. I think in general in the market. And I think the growth will pretty much come from all areas. And as you know, we just expect that we will slow down the growth, I mean, internally and to make sure that we'll only take care of our very good customers for their expansion, but we do not expect our customers, in this kind of very challenging economy, to be thinking about making some major expansion. So therefore, naturally if they are not going to be doing a whole lot, we would not expect growth will be in that double-digit category.

In terms of acquisition of new loans or new origination you looked at, particularly on the C&I side, we again have to keep in mind, one is that most likely in this kind of economic time we, even at a good time normally we did not make a unsecured line of credit for a brand new startup. So this is not going to be a new customer just coming from nowhere and then say they are looking for the first lending relationship.

Then most of our commercial C&I and then trade finance loans in the past had come from mature season customers of other banks who decided that they will better off to come to East West because of the service that we provide and because of the value added part of our connection with the Asian countries.

We obviously will continue to look for the best of class of this type of customers. Again, keep in mind that in the challenging economic environment to keep getting aggressive and to go after your customers of other banks may not be the wisest idea. And so we are just going to be a little bit more cautious and that's why we think that 3% growth will be more prudent.

Joe Gladue - B. Riley

Okay, thank you.

Dominic Ng

Thank you.

Operator

Your next question comes from the line of Erika Penala of Merrill Lynch

Erika Penala - Merrill Lynch

Good morning.

Dominic Ng

Good morning.

Erika Penala - Merrill Lynch

I just wanted to dissect your credit loss outlook for '08 a little bit further. What exactly are you assuming in terms of losses as for your construction bucket and for your C&I bucket of loans?

Julia Gouw

We don't have the breakdown, but I speculate the C&I that's a lot more difficult to predict on the C&I. At this moment, we think that the losses will not exceed to probably about 20 basis point. That's what we think at this moment, based upon what we see in the portfolio, however, as we mentioned, C&I, some problems can pop very quickly and the charge-off can come very quickly for C&I loan compared to real estate, which because there is value to develop like me casement the real estate we can better estimate the ultimate losses on those properties.

Dominic Ng

And let me explain on this also that for the last few years we have very, very little C&I losses, almost none. And in fact, we had no problem until the fourth quarter. I know we took a $2 million charge-off for a C&I loan. So, it's really unpredictable, but I mean our experience is that whenever there is going to be coming to a time of recession, that usually is the portfolio that no matter how strong the bank is, the smaller they have C&I loans, my recollection in '93, '94 was, I look around California, every bank's taking hit on the C&I loans.

So, just keeping that in my perspective and then we think that we need to be conservative and we need to think about there is going to be potential likelihood that C&I loans may have some problem. But at this stage, you see it's really hard for us to say, because if we know there is something bad we already put a charge-off to it.

So, it's very different than the real estate trend that is going on right now that we actually see the downturn of the housing markets. And we see that due to this down turn, let's say any construction, residential loan will have maybe a little bit harder time to unload the inventory, because homes are being built and now taking a little bit longer time to sell. So that's a much easier trend for us to see what's happening, but C&I will have a little bit better color maybe another three to six months down the road.

Erika Penala - Merrill Lynch

Okay. And I just wanted to ask one more question as a follow-up to James's margin question. Julia, could you give us a little bit more color on what you expect in terms of the quarterly progression of the margin. Do you expect material pressure from the side cuts to be concentrated in the first half of '08 and for the margins to stabilize thereafter?

Julia Gouw

Yeah. The Fed cut another time, the pressure will be in the first half, because as the time goes by, hopefully two years, some of the deposit rates the competition will track more. In general, the deposit rates track to treasury whether it's three month, six months, and one year treasury. But right now, despite the treasuries are very high on those deposit rates. So, as the deposit rates come down, that would help our margins in the second half.

Erika Penala - Merrill Lynch

Okay. Thank you for taking my call.

Dominic Ng

Thank you.

Operator

The next question comes from the line of Jennifer Demba of SunTrust Robinson Humphrey.

Jennifer Demba - SunTrust Robinson Humphrey

Good morning. I was just wondering, Julia, if you could give us an update as to how big your residential construction and land portfolio is today and where are you seeing the most pressure geographically at this point?

Julia Gouw

Okay. In some of the construction loans, we have $1.5 billion outstanding, about $1 billion is residential and out of that what we continue to see what we have being saying would be the Inland Empire on the construction loans and we have about $122 million in the Inland Empire construction loans.

Dominic Ng

Residential construction?

Julia Gouw

Yeah, residential construction. And then in terms of the land loan, we have $681 million in land loan.

Jennifer Demba - SunTrust Robinson Humphrey

Okay, thank you.

Julia Gouw

Thank you.

Operator

(Operator Instructions) The next question comes from the line of Christopher Nolan of Oppenheimer & Company.

Christopher Nolan - Oppenheimer & Company

Good morning, any of the net charge-offs led to the Desert Community Bank?

Julia Gouw

Very little.

Christopher Nolan - Oppenheimer & Company

Okay, so something came in Desert Community. My second follow-up question is what was the reason for the suddenly higher and the fourth quarter versus the third quarter?

Julia Gouw

It's because the third quarter we issued the shares in August for the acquisition.

Dominic Ng

Of Desert Community Bank.

Julia Gouw

Of Desert Community Bank.

Christopher Nolan - Oppenheimer & Company

Okay, both the ending period shares one of as well.

Julia Gouw

I think the ending period should be very, very little. I think that end period goes up may be 175,000, most of them, about 150,000 came from the restricted stock that we issued for all staff.

Christopher Nolan - Oppenheimer & Company

Got you. And finally back to the capital question, in 2007, when you were growing your balance sheet roughly around 10% yearly, as you maybe need a return on equity around 15% to maintain your capital ratios. Going forward for 2008, given the slower balance sheet growth, what sort of ROE are you anticipating sufficient for internal capital generation?

Julia Gouw

The REO --we will put 2008 like the ROE will be lower, but our capital ratio will continue to go up because we still have very good profitability, despite the fact that it's lower than 2007. So, as a result, if we don't grow the assets by March, we will continue to build up the capital.

Christopher Nolan - Oppenheimer & Company

I guess my question is, what are you basing that on, or what sort of ROE would you need to actually keep the capital ratio steady, so if you get above that baseline you start building capital?

Julia Gouw

We don't grow. We grow the assets very little. Let say only 3% to 5%, we will grow the capital with maybe 12% to 13% ROE.

Christopher Nolan - Oppenheimer & Company

Great, thank you.

Julia Gouw

Our ROE, in the past, on the tangible basis is very high, about 20%, on the GAAP basis at 15% to 16% ROE, we can support a 15% to 18% asset growth.

Christopher Nolan - Oppenheimer & Company

Okay, thank you.

Operator

Your next question comes from the line of Chris Stulpin of D.A. Davidson

Chris Stulpin - D.A. Davidson

Hi, I came in to this call a little late. So I am sorry if you already covered this, but of your seven construction loans for $31.7 million, were they all located in the [Central Alabama or the Byzantine Empire]?

Julia Gouw

No, like I would say about 60% in the Inland Empire, but many of the new ones coming in the Inland Empire. And then the rest would be in Southern California, Los Angeles area.

Chris Stulpin - D.A. Davidson

Okay, thank you. That's all.

Julia Gouw

Thank you

Chris Stulpin - D.A. Davidson

Sure.

Operator

And your next question is a follow-up question from the line of Andrea Jao of Lehman Brothers.

Andrea Jao - Lehman Brothers.

Hello, again. As you grow deposits more than loans, will you be putting the funds in securities or do you plan to pay down borrowings?

Julia Gouw

We'll pay down borrowings, because the yield to buy securities, it's really not attractive. So, any excess of cash that we have, we'll pay down borrowings.

Andrea Jao - Lehman Brothers.

Okay. So, should the securities book be relatively stable in 2008, given that I assume internal securitization should also kind of dry up, right?

Julia Gouw

We expect to have about $500 million because we can use that for collateral, for our borrowings.

Andrea Jao

Okay, perfect. Thank you.

Julia Gouw

Thank you.

Dominic Ng

Thank you.

Operator

And you have another follow-up question from the lines of James Abbott of FBR Capital Markets.

James Abbott - FBR Capital Markets

Yeah, I was just interested in a little detail on the loans that you've sold, the construction loans. As to what the original LTV was when you originated it, and then suddenly if you're not selling them for much of a loss if anything. I was kind of curious as to what the implied value of those properties are now today? Is it a 30% reduction of the original appraisals, is it 40 or 50, kind of give us a sense?

Julia Gouw

Well, as you know most of our loans have said good loan to value. So, when we sell them notes, the buyer will take a look if there is any opportunity for them to make money to do that. So, while the values haven't dropped, there is sufficient equity to attract a note buyer because they are not going to just buy the note for the interest rates on the notes.

James Abbott - FBR Capital Markets

Right. And you are not, they are not paying premium necessarily, but you do not have to sell them at discounts?

Julia Gouw

Correct.

James Abbott - FBR Capital Markets

Okay. And the loaned values on most of those construction loans are probably somewhere in the 60% to 70% range?

Julia Gouw

Yes.

James Abbott - FBR Capital Markets

Okay. Thank you very much again.

Julia Gouw

Thank you.

Operator

And you have no questions at this time. I would now like to turn the call back over to management for closing remarks.

Dominic Ng

Well, I'd like to thank everyone for joining us for today's call. And I look forward to speaking with you again in April. Thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. And you may now disconnect.

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