East West Bancorp, Inc. (EWBC) Q3 2007 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and welcome to the Q3 2007 East West Bancorp Earnings Conference Call. My name is Angelic and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will facilitate a question-and-answer session towards the end of today's conference [Operator Instructions]. I would now like to turn the presentation over to your host for today’s call Ms. Irene Oh, First Vice President. Please proceed.

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

Thank you, Irene. Good morning and thank you for joining us in today's call. Yesterday afternoon, we were pleased to announce third quarter net income of $41.3 million and earnings per diluted share of $0.57. For the 18th consecutive quarter, East West achieved double digit growth in both net income and earnings per share. We reached another milestone for the quarter, surpassing $100 million in net interest income. Julia will provide a summary of the financial details of the third quarter shortly. But first, I would like to provide a brief review of the quarter and update on our outlook for the rest of 2007. Quarter-after-quarter, East West has been able to achieve success due to our strong core profitability and our strong discipline. The third quarter 2007 was the 18th consecutive quarter that our efficiency ratio was below 40%. We are able to successfully balance, maintaining excellent operating efficiency, while we continue to strategically invest in the future. We continue to execute our long-term strategy to grow the franchise, both organically and through acquisitions. During the third quarter, we closed the Desert Community Bank acquisition, which allow us to grow our business, customer base, and market footprint. East West ended the third quarter with a record $11.6 billion in total assets and a record $8.6 billion in total gross loans. During the quarter, East West originated a total of $1.2 billion in loans. Organic loan growth analyzed for the quarter, excluding the impact of securitization and the acquisition of Desert Community Bank was a strong 23%. This loan growth was achieved in all areas of our business. Real estate loans, trade finance, and commercial loans all grew at double digit figures, both quarter-to-date and year-to-date on an annualized basis. I would like to spend a few moments discussing the current lending environment, the effects of the softening housing market and credit quality of our loan portfolio. Year-after-year, at both good and challenging lending environment, East West has been successful and performed above its peers. This is largely due to our emphasis and culture of balancing loan growth with sound credit fundamentals. Overall, we believe that the asset quality of our entire loan portfolio is sound, including our real estate and construction loan portfolio. With the current market condition and the downturn in the housing market, residential construction loans are in area of increasing concern for the Bank. However, we feel that our asset quality is above average and stronger than our peer banks. We believe that are any future… any potential future charge-offs will be manageable and that we will be able to weather the current downturn in the real estate market. We have systematically reviewed our entire loan portfolio for potential weaknesses particularly, our residential construction portfolio. At this point, we believed our residential construction loan ended Inland Empire area are the most significant area of potential witness if the downturn, the housing market continues to extend. As of September 30, 2007, we had a current balance of $124 million and residential construction loans in the Inland Empire. As of September 30, 2007, we actually had no non-performing residential construction loans located in the Inland Empire. However, given the increasing inventory of unsold homes and ongoing weakness in the Inland Empire, there maybe non-performing residential construction loans in this area in the future. I would like to point out that 75% of our residential construction loans are in our urban areas of California. Such as the City of Los Angeles, the San Gabriel Valley, and San Francisco where there is currently stable demand. Despite the fact that most of our residential loans are in areas where there is still demand, we are still proactively and methodically reviewing our entire portfolio. I would also like to confirm that we have a long standing tradition of not making predatory loans. We have never made any subprime loans and do not have any subprime loans, securities, or warehouse loans to subprime mortgage bankers. For the third quarter, non-performing assets as a percentage of total assets increased to 37 basis points from 23 basis points at the end of the prior quarter. After total $42.8 million in non-performing loans at the end of the third quarter, 2$5.6 million or 60% were residential construction loans. This $25.6 million in non-performing residential construction loans as of September 30, 2007, is primarily due to two condo construction loans. One is 32 unit condo construction loan located in San Francisco, with the balance of $11 million. As of today, this loan has been brought current and is expected to pay down approximately to $1 million by the end of the year. The other loan with the balance of total $7.8 million is a 20 unit condo in Los Angeles. We believe the value on this property is holding up and that we would experience minimum losses if any from this loan. In the third quarter, we continue to experience low levels of charge-offs in all lending areas and had net loan charge-offs of 4 basis point or $853,000 for the quarter, an increase of only 1 basis point from the previous quarter. However, we recognize that an increase in non-performing loans may lead to a high level of charge-offs in the near future if the downturn the housing market continues. We believe that we are well positioned to handle this challenging credit environment and are proactively managing our risk exposure the $3 million provision for loan losses this quarter compared to no provision in the prior quarter. Reflects the increase delinquent and non-performing loans and also the higher than expected loan growth. We currently believe the loan loss provision for the fourth quarter will also be approximately $3 million. Now, I would like to shift the discussion on our outlook for the rest of 2007. Based on the performance year-to-date and our expectations for the rest of the year, we have increased our estimate or earnings per share for the full year of 2007. We now projected that earning per share for the full year 2007 will be approximately $2.65 increase of $0.30 or 13% from 2006. We believe that overall our core business and profitability remains very strong and will allow us to close 2007 as our 11th consecutive year of record earnings. I would now turn the call over to Julia, who will discuss in more depth the results of the third quarter of 2007.

Thank you, Dominic. I will provide a summary on the financial results for the third quarter of 2007. The release contain a detailed discussion of the financial results for the quarter, so our focus on key areas. Third quarter diluted earnings per share was $0.67, an increase of 16% or $0.09 per share from the prior year period and an increase of $0.01 per share from the previous quarter. Our net interest margin remains stable at 3.95% for the quarter, a 2 basis point decrease from 3.97% in the second quarter of 2007. Due to the recent 50 basis point cut in the Fed funds rate, our net interest margin will be impacted for a short period of time at many of our loans immediately re-priced downward after the rate cut and it takes a couple of quarters to re-price all the term deposits. As such, we expect the net interest margin to be approximately 3.90% for the fourth quarter of 2007 and approximately 3.93% for the full year 2007. We anticipate that this decrease in margin will only be for the next quarter that our net interest margin will stabilize in the first quarter of 2008. Our loan portfolio is mostly tied to variable indices. As of September 30, 2007, 58% of our loan portfolio re-priced immediately, 7% re-priced within the year, and 16% were tied to intermediate index between one and three years. For the third quarter of 2007, the average volume of earnings assets was $10.5 billion and the yield was 7.54%, an increase of $0.5 billion or 3 basis points from an average volume of $10 billion and a yield of 7.51% for the previous quarter. The cost of deposits for the third quarter of 2007 totaled 3.35%, a decrease of 7 basis points from 3.42% in the prior quarter. During the quarter, we were able to actively lower the cost of deposits by reducing higher costs, money market, and time deposits. Non-interest income had been going at a double digit rate the last several quarters. Non-interests income for the third quarter rose to $14 million, 73% higher than a year ago level of $8.1 million. This includes a net gain of $2.8 million on the sale of investment securities and a gain of $1.3 million from the sale of an office building, previously used to house part of our back office. Excluding the impact of these gains, core non-interest income for the quarter was $10 million for the quarter, a 34% higher year-over-year. This increase in non-interest income is driven by growth in branch and loan fees and increased demand for letters of credit. Non-interest expense was $47.1 million for the third quarter, an increase of 9% or $3.9 millions from the prior quarter figure. As Desert Community Bank acquisition closed on August 17, the third quarter operating expenses only partially factor in the added cost associated with the additional nine branches. We anticipate that the fourth quarter non-interest expense will grow about 5% from the third quarter figure, as we continue to carefully manage all expenses that do not to directly correlate to earnings gross. Our loan portfolio continues to be well diversified and secure. Additionally, our loan portfolio has become more seasoned and predictable. Portfolio characteristics include commercial real estate loans as of September 30, 2007, at an average balance of $1.2 million, average loan to value of 55%, and seasoning of 2.5 years. Multifamily loans had an average balance of $777,000, average loan to value of 61%, and average seasoning of 2.3 years. Construction loans had an average balance of 2.4 million, average loan to value of 68%, and average seasoning of 1.4 years. Finally, single family loans had an average balance of $335,000, average loan to value 61%, and average seasoning 1.6 years. Year-to-date, we have securitized a total of $1.1 billion in single family and multifamily loan. This securitization plan has enabled us to improve our liquidity and also improve our margin, as we have been able to replace lower yielding securities with our MBS securities. For the fourth quarter, we intend to securitize about $150 million additional loans. For 2008, we expect to decrease our securitization platform and continue to grow our balance sheet as we will have sufficient collateral. I will now spend a few moments to discuss capital. As of September 30, 2007, stock holders’ equity was $1.2 billion, an increase of $181.6 million or 18% from year ago figure. During the third quarter, we issued approximately 2 million additional shares of stock and 30 million trust preferred securities in conjunction with Desert Community Bank acquisition. As of September 30, 2007, our Tier 1 leverage, Tier 1 risk based, and total risk based capital ratios were 8.88% 8.98%, and 10.57% respectively. During the quarter, we have repurchased $7.3 million of our common stock and as of September 30, 2007, we have $26.9 million of repurchased authorization remaining. Our strong capital levels and high profitability give us the continuous ability to provide strong returns for our shareholders. I will now turn the call back to Dominic.

Thank you, Julia. Thank you everyone for joining the call this morning, and for your continuous support of East West. I will now open the call to question. Question and Answer

[Operator Instructions]. Your first question comes from line of Andrea Jao with Lehman Brothers. Please proceed.

Good morning everyone.

Good morning.

Just thinking about loan growth and how you will manage the balance sheet in the forth quarter and then into 2008. Could you tell us what the deposit growth ex-acquisitions was this quarter and kind of your outlook for that? And then how are you going to fund loan growth… actually move into 2008.

For this quarter, our organic loan growth excluding the acquisitions, it dropped about 2% about 100…

Deposit growth.

Under deposit and… but most of those are the high rate money market and CD that we… on purpose try to review and some of the reduction also came from the escrow title balances which at this moment really at the low level of about $165 million, given the nature of escrow title and the reduced activities that expected, plus at this moment, our escrow title balance is at a very low level, the impact in the future would be a lot less. So, deposit growth continuous to be challenging especially at the low cost deposits and we will continue to work on to get the deposit growth. In term of the loan growth, this quarter, it’s a pretty high growth because the pay-off has slowdown dramatically in the third quarter. So, we will continue to have some securitization in the fourth quarter. And going forward, we are projecting that the loan growth may not be that high because there is possibility also that the activities in the real estate and the markets slowdown on commercial real estate and other lending products. So, the loan growth is more in the 12% to 13% we can still support some of the loan growth to a borrowings or potentially selling some of the loans to get liquidity or further securitizing some more, not to the same level, in 2008, most likely not at the same level as what we have been doing this year, but we may… continue to do some of that.

I want to add why we think that loan growth would not be at sort of 23% our analyzed rate in 2008 is that, for example, like construction lending, we were able to originate plenty of them to the last few years, which now… I mean, they are drawing down, still currently. And therefore, I think that we continue to see construction lending… our loan balance is increase. However, in 2008-2009, I would assume that there are many developers who are going to be holding tight, who are not going to start new project. And for that reason, the likelihood… so, what we will be seeing in 2008 will be a pay down in that construction loan balance without adding much additional new origination. And that in general would help pretty much offset while the commercial C&I and trade finance and then some of the other real estate lending, they will still be growing, but then you have one that will be paying down faster than the norm for the last few years and that will result in loan growth maybe in the low teens rather than 20% some odd. That’s what we are currently experiencing. And now… I always looked at it as, when it comes down to deposits, we can always get more deposit, if we’re willing to pay the rate. But in a very, very interesting situation, the last two months, when we are seeing Countrywide or IndyMac they are paying 5.5%, 5.7% even after the rate cut. And for us to try to get deposits to pay above Fed fund rate, it just doesn’t make sense. So, what we do is that we will get deposits, as we can get it below Fed fund rate. But if we have to pay up to get Fed fund rate just for window addressing, we would rather just borrow, and that’s been the philosophy that we have been going on and we tried, I mean, as much as we feel that having a lot of deposits to fund a loan, looks very good, but they have to be good deposits, not window addressing deposits. So, that’s the reason why we have not emphasize to go out there. And this mode, because it just happen the market, if a little unusual, I think the last two months because of liquidity issue that affects some of the other banks, who need to do what they need to do, which they do the rising for them, but for us to go and match today is not the right thing. And therefore, we just going to hold out for few months, but this kind of temporary incident will get back to normal, I believe. So, when things get back to normal, we will be able to go out and get deposit again.

This is perfect. Very helpful. Thank you.

Thank you.

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

Good morning Dominic. Good morning Julia.

Good morning.

Good morning.

I wanted to get an update on the exposure and the Inland Empire, I think last quarter you talked about $144 million and then obviously you added Desert Community Bank. And so, I am curious to get an update on exposure to the area both an outstandings and commitments. And then secondly, we are going through your loan-to-value ratio, so I am basically hearing that the there's not very many bids out there for land, presently. And so, I am curious to hear how you are sort of doing your appraisals and valuations on some of those properties out there?

Brett, the question about exposure Inland Empire, I mean, are you referring any type of… I know you talk about residential. We… residential construction loans, we currently have $124 million, residential construction loans.

Okay.

And that include both Desert Community Bank and East West, and I can give you even a further breakdown. And Desert Community Bank outstanding balance of residential construction loans approximate $30 million, and the rest of them are East West Banks, before DCB. So, I will combine, together is $124 million, total of residential construction loans.

Okay.

And the question of LTV?

Dominic, it sounds to me like you obviously have worked one of the balance sheet after the… ended of the quarter the San Francisco credit. And so, but this sounded like in your prepared comments that you are expecting that there might some NPAs from the Inland Empire.

Yes, go ahead.

Well, as I said I’m curious how… I just hear out there that this is not… in terms of raw land and some residential construction units. There’s just not a lot of bid. And so, I curious how you evaluate the market and how you sort of appraise things if there’s not a lot of transactions occurring?

It’s challenging right now, because since August the market is kind of… went dead for a little while. So, now it started picking up a little bit. However, still, I think it’s nearly… it… I mean the whole sort of like a new home development area. It’s having a lot of liquidity crunch from the… from lack of mortgage availability and also the concern about… I mean the subprime all of that kind of stuff and I think are affecting the market. I’m hearing the same kind of stories like you do about… like the large home builders that we’ve seen on the newspaper like the Norg [ph], KB Home et cetera. They all picking massive write-down by not picking those options to acquire certain land and then also picking charge-off for their residential development. So, we are seeing that happening. What we are doing right now is that at this stage, interesting enough, like I said, because it only started in August when this sort of market changed dramatically. So, I think it is a little bit early for us to tell. And therefore, I… my position is that, sort of the bank position is that we really feel that with all this turmoil going on in the Inland Empire eventually something has to happen, even within our portfolio. So, we are waiting. And now… and so that is something that we just wanted to send cautionary note in terms of… we don’t know when this going to happen. But I just think that… for example, I’ll just share with you that we have $124 million of residential construction loans there. Now, while loan to values lower, that out to help us to get through this turmoil better than other banks, who are announcing a lot of charge-off lately. But you never know, because if it continues to go south or the market does not correct itself and continue to have sort of no bid, then we would need to address some of the clients who may become problematic. Secondly, I think that what I wanted to also share with you is that we do not wanted to do a very drastic approach that is at the minute you see the market going haywire and then the next thing happens which is just aggressively charging-off and dump all the assets with no record of maybe in two or three months things may get better. So, I think that the advantage of East West is that we do not have the kind of major problems like some of the other in-financial institutions have. And there is really no reason for us to panic. So, what we do is that we… some problem as it come out, we work on it with the clients to make sure that we took care of these problems, one after another. Hopefully, it does not get any further south in terms of the market, and we will be able to manage it pretty well. But if it does go south, I mean further self in terms of deterioration of the market value and so forth, I still think that overall we should be able to do better than others. But if market continues to go south we will be impacted without any question.

Okay. And then, just one of the question if I made that I have heard that some people comment that the commercial real estate market is still to early to tell, but with condo is out and seems like less yield seekers out there, potentially the pricing could be more favorable going forward on a relative basis, anyway. So, I am just curious to hear some comments on the commercial real estate market as you see it and any opportunities that maybe arising given that change and risk profiling by--?

Are you talking about loan pricing?

Yes, just loan pricing and then just generally how you see theory market?

There is no question that we say that it will become more positive that is… obviously in the past… conduits was originating many commercial real estate loans at fixed rate at a very, very low rate and that we couldn’t compete and many of our very good clients that have… that have a plan to hold on their properties for long-term, rightfully so chose conduit to refinance their commercial real estate loans, because we are talking about we are charging like 8% or 8.25% at adjustable and while others do in 10 years 6% and 6.5%, just no way for us to compete. In fact, to be fair with our clients, we actually encourage them to do something like that because what is good for the client is eventually in the long run is good for us anyway. So, that fortunately, we always felt that this in not a sustainable type of scenario, and though, on the whole, I think as of today, our models all of these conduits are gone now. So, with that now we are basically just competing with other banks. And so, I think that would help that loan pricing coming back in a more reasonable margin. And I think that would help us in the next year or two. So, whenever, there is something bad like, for example, you look at… I expect that the constructional lending in the next two years, it is going to slowdown dramatically. However, if we do not get the volume maybe commercial real estate we can make up with the price, one way or the other, we still come back even hopefully.

Okay. Great. Thank you for the color.

Thank you.

Your next question comes from the line of Joe Morford of RBC Capital Markets. Please proceed.

Good morning Dominic and Julia.

Good morning.

Good morning.

I just… I guess the quick question, following-up on China Minsheng Bank's investment in UCBH. There are some comments that some of the other Chinese banks are interested in investing in the U.S as well. Is that some thing that appeals to you all and have you had any discussions along those lines, probably speaking with your thought on that kind of partnership?

I think it is a good trend. I think what I liked about it is that, many time you have one historical transaction, it opened up for more. And I looked at as that we do not have an urgent need to do anything and we really… we do not have a strategic reason that we need to do any thing. However, I always look at it as, East West Bank focus is always been long-term shareholder value. When I look at long-term shareholder value, it’s more, not just long-term in way that don’t worry about now and then I will worry about it five years after in the long-term, but it is sustainable on going increase of core earning if you look at out, sort of going to be soon 11 consecutive record earnings that is the kind of example that I am talking about. If someone can help us to have sustainable recurring core earnings for many years to come and make our lives easier, we welcome them. So, when it comes down to strategic partnership with mainland Chinese banks, our position will be… obviously we will saw that after, but the fact is we will… wanted to do it if we know they are very, very clear meaningful strategic potential for us to increase our let say maybe core deposit or increase our fee income and et cetera, et cetera, anything that can help to grow our balance sheet better and to create core earnings better we more to welcome. We have no… I mean I know that it is having institutional investor to put 5% or 9.9% is no difference that having mainland Chinese bank to put in the same percentage. But I would love to have that kind of arrangement only if we have very clear understanding that there will be very strong potential for future sustainable core earning. One thing that we wanted to be sure is that we not only that the arrangement will give us a strong comfort that we will get that kind of future core earning. But we also want make sure that by signing up something would not cause us to have less desirable relationship with all the other banks we are doing business with because currently we have substantial numbers their corresponding bank that we are going to do business within China and our position is that if we going to enter any kind of arrangement, we wanted to make sure arrangement is substantially outweighed we currently are getting from the rest of the other financial institution in China. And so, that’s basically is the kind of very logical common sense approach of what’s best for our shareholder, and if there is something that makes sense, we obviously will be more in interested to entertain. And so, that’s what we are right now.

Okay. Make sense. Thanks Dominic.

Thank you.

Your next question comes from the line of Aaron Deer of Sandler O'Neill & Partners. Please proceed Aaron Deer - Sandler O'Neill & Partners: Hi, good morning everyone.

Good morning. Aaron Deer - Sandler O'Neill & Partners: Hi. I just wanted to follow-up I guess on the expense. They seem to be up fairly sharply this quarter obviously big part of that was due to the acquisition. But if I heard you correctly, it sounds like you are again calling for expenses to be up an additional 5% in the fourth quarter. It… I just confirm if that’s correct? And then what’s driving that I am not sure some of it is production related. But are there also any cost related to the acquisition specifically that you can pull out.

Yes, actually, 5% sequentially compared to the third quarter is about wide and mostly is that Desert Community Bank only come in 1.5% per month for the quarter. So, some of those expenses… work increased in the fourth quarter, because it’s a full quarter. Aaron Deer - Sandler O'Neill & Partners: I understand. But I guess in the third quarter down here the expenses were up pretty sharply. Is most of that done just due to the higher production levels that you show or is there anything else going on there?

Mostly the sales at our Desert Community Bank in addition to some of the East West expense growth. Aaron Deer - Sandler O'Neill & Partners: Okay. And then, lastly, given the… your current capital levels and growth outlook, what are you expecting in terms of the share repurchases going forward?

Well, when our loan growth was 23%, we are not increasing our total risk base capital. So, as well as our loan growth is high, we probably would hold off the stock buyback. If the loan growth is less than 15%, we will be accumulating excess capital. Aaron Deer - Sandler O'Neill & Partners: Okay. That’s helpful. Thank you both.

Thank you.

Your next question comes from the line of Manuel Ramirez with KBW. Please proceed. Manuel Ramirez - Keefe, Bruyette & Woods: Hi, good morning. Just one quick question. Could you talk a little bit about where delinquencies were outside of NPAs in the quarter? And as it might expected with particularly focused on the construction outside? Thanks.

In term of the overall delinquency, we… hang on, let me get the total. Comparing to June, 60 day delinquency itself pretty small about $18 million compared to $8 million. We do have increased 30 day delinquency. But sometimes some of them are just a temporary that people that just a few days, 30 days and they may get up. So, that’s what the delinquencies are. Usually, we really watch over 60 day, because that’s the one that potentially will go through 90 day. Manuel Ramirez - Keefe, Bruyette & Woods: So, that would 60 plus the number that you gave me.

Correct. Manuel Ramirez - Keefe, Bruyette & Woods: Terrific. Thank you.

Thank you.

Your next question comes from the line of Lana Chan with BMO Capital Markets. Please proceed.

Hi, good morning. On the construction loans that detail you gave us before, it looks like versus the second quarter numbers the average LTV increased from 62% to 68% and the average loan size went down though. So, I was just wondering is there anything happening there, in particular that’s driving the LTV up?

Yes. The average loans dropped because our Desert Community Bank is pretty small that to average loan price. So, it brought it down. And they also have slightly higher LTV and some of the construction loans are paid off, like some of the lower LTV, so like… so, right now, in total, about 68% is the LTV for the construction portfolio.

Okay. And then and my next question is on the margin. You said your thoughts are that may stabilize in the first quarter of ’08. Is that based on any other rate cuts either I guess by the end of this year or if we get another rate cut, does… as well as go takes not some time for the deposit rates to catch up.

Yes, that does not include since we don’t know they will be cut or not. Every time there is a cut, there could be immediate… the first quarter may have some hit, but sometimes if the cut is close enough, some of the CD’s may not be re-price at the first level, so, it may re-price down like assets re-price, so that the impact can be minimized on the subsequent rate cut, but our assumption is based upon no further rate cuts.

Okay. Thank You.

Thank You.

Your next question comes from the line of James Abbott of FBR Capital Market. Please proceed. James Abbott - Friedman, Billings Ramsey & Co: Hi, good morning. My question was on the loan to values as well. So, that’s been answered. But I might ask if I can. On interest reserves for these loans, are you experiencing, and if you… probably are, but can you quantify than any sort of fashion, how much your developers are digging into or utilizing their interest reserve as oppose to selling the home and using the proceeds to pay-down the loan balance. Give us a sense of that?

Well, like most of our interest reserves are used during the construction period. So, if… like the absorption rates goes down, there are two things that could happen, you have the interest reserve and have to come out with that own cash to keep the loans current, or if they get some proceeds fact enough than, they will be able to keep the loan current and make a pay-down. A good example is sometimes the value is so good, and we don’t expect losses at all like the $11 million condo construction in San Francisco, it was non-performing because the sale did not close fast enough to keep the interest current. But it has been brought current by now, and we expect a major pay-down on that loan, and no losses for that loan. So, a loan can still be non-performing and not making the interest payments, but later it can be made up by the sale and we will be paid off without any problems. James Abbott - Friedman, Billings Ramsey & Co: Okay. Do you track the number of loans that have maxed out the interest reserve and in other words have utilized all of the interest reserve at this point and the payments are being made--?

Well, I think that it’s not just an interest reserve. I think we basically tracked all loans that have potential problem and that’s why we have classified assets, and as asset gets classified for many different reasons. I think interest reserve being used or interest reserve being usurped and now being funded by the developer own pocket money and those are all signs of threat that may require classification of loans. And so, I think to that regard, because we do ongoing classification of our loan portfolio and obviously interest reserve will be one of the elements will be one of the elements that we looked at for construction loan to se whether they’re a threat. The other thing that decides interest… you may have developer who does an incredible job who actually were able to get the construction project finished without using any interest reserve or… and they are rarely… but we do see that happen. They actually come out under budget, but besides they have interest reserve execution, they may also have… because of the under budget have additional cushion. But if we made the loan at a high LTV, and on top of that happen to be the market that they have sort of like nothing going on and this developer need to sell fast and they may still run into a potential a lot situation. Even without using, because if the value of the sale dropped dramatically because of the… their unusual market condition today. And on top of that, the interest reserve even though they did not use it, we know that its not adequate enough to offset against that… the value between the potential sale and the cause of the loan then I think that we still may have loan. So, I think that we do look at interest reserve, very much of a key ingredient for our classification of assets, but it’s not the only thing that we would sort of like track how many loans that have interest reserves will be extended, so to speak. James Abbott - Friedman, Billings Ramsey & Co: Okay. Thank you. That’s helpful. On the sales rate, can you give us some insight into the monthly sales rates of home in the Inland Empire versus what you are experiencing in-field construction say in some of the sub divisions in Los Angeles or this what you would categorize as urban?

We don’t have like the statistics how many, but like definitely the Inland Empire the sales are slower than here. But even like every area the sales are not fast as like what it used to be that like it is… other demand is higher. The Inland Empire had been over building the last few years. So, it makes it harder even for people to sell because there is so much inventory out there. James Abbott - Friedman, Billings Ramsey & Co: Maybe another way to ask the question and if you don't track that statistic, is classified assets of urban properties versus classified assets in the Inland Empire, is it dramatically skewed towards the Inland Empire or is it balanced, is it… what can you tell us there?

Well, not really because our portfolio in Inland Empire is… it’s a small part like we mentioned 75% are in the L.A. San Francisco area. So… and also, the timing of the development is different. So, the newer projects usually have not shown any stress yet, so, like… so most likely they are not being classified yet until they are further along that you see problems with properties.. James Abbott - Friedman, Billings Ramsey & Co: Okay. All right. Thank you for your answers.

Your next question comes from Erika Penala with Merrill Lynch. Please proceed.

Good morning.

Good morning.

I was wondering if you had any sense that the asset quality issues that you are seeing right now in your residential construction portfolio will eventually lead into commercial construction or certain segments of term CRE. And if so, what kind of lag do you expect?

It should not… well, what you are asking is really a very macro economic question and I don’t… having from my sense right now, I don’t see that happening, we are taking assumption… say we are taking assumption that, well, first of residential lending, the residential market is not only just going to be restricted to this new home development area, but permeate throughout the state of California and continue to scope [ph] more and more depressed. And finally, hit the consumer in the head, let's say that, well, we stop buying. And I think next thing happened, jobs are being cut from major corporations and small business, then I would assume that at that point commercial real estate market was also start slowing down and then was also starting having their evaluation coming down. And I think that will be the most likely scenario when that happen. And obviously, I think the whole country’s economists are all struggling with that question is that with the subprime market with what’s happening with some of the housing situations. Why are consumers do spending and why are jobs still created? Why are companies still making record earnings? We don’t know. And that’s something that we just have to play by the years and be proactive and our position has always been proactive and then also during good time trying to leave some money on the table during the good time and that’s why our capital ratio is always pretty solid. And when it comes down to underwriting loans, having a little bit lower loan term values so that… I mean the overall characteristics of the market are pretty much the same banks-to-bank. However, if we have a little more cushion then we can sort of like deal with that slowdown maybe a little bit better than the others. And that’s where we are right now.

Do you… given your cautious commentary on the local housing market, do you expect to be more meaningfully building reserves from here?

I… we didn’t hear your question. Can you speak louder?

Sure. Given your cautious commentary on the housing market, do you expect to be more meaningfully building reserves from here?

I think the building reserve is all based on whatever the… I mean how many classified assets we have, how many delinquency, how many non-performing, and how much potential losses. So, we expect obviously, I think for the last five to 10 years, we… I mean banks do not just reserve just based on whenever we feel like it. So, therefore, we have everything is based on the financial models that we put together and get reviewed by outside auditors. And so, in that regard, I think that we… if you ask me to make a general comment and I’ve said many times, I think that based on what’s happening in the market, I would say that I am very conscious about what the market was look like in the few months down the road. But we would only be able to build other provisions primary based on whatever we have on balance sheet. So, I think that if we see strength of more non-performing loans coming up, in the pipeline, in the future, I mean you bet, we will have provisions. Because by then, we have much more justifiable reason to set a higher provision for loan losses. And if the values continue to come down further, we have more reason to book additional provisions. And so, this something that why we have look at it very diligently. And at this point… and now maybe a year ago or two years ago, you can look at it once every few months and then now we look at these construction real estate portfolio. We need to look at it a little bit more closer and that’s what we are doing right now. Because if the market can change value on a monthly basis, that would affect our outlook in terms of clarification of provision of loan losses differently, and that’s why taking a proactive approach and looking at construction portfolio very diligently is the only way to go. And then what we do is that whatever happened, it happens and then we just… if there is more losses… more delinquency, more non-performing, we just have to book more provisions and that’s what we need to do. And then so, that’s what we are going to be looking at in the future. And then if next quarter comes back, we have NPA then… and then also it is what it is and we will book to provision accordingly to what the number.

Okay. And the one last question if I may. Did you experience much deposit iteration after the Desert Community deal close? Are you expecting any more iteration?

Altogether 5% as of today. And the 5% a primary due to a major deposit campaign from previous management. And at what percentage, it think, it’s like 5.5% or something like that. And we didn’t want that 5.5% to stay on, and so, the majority of them… so, for those that are hot money that 4% to 5% and not really core customers and then pretty much have left. And so, as of today, as it’s exactly 5% reduction in the Desert Community Bank deposit balance.

Thank you for taking my call.

Thank you

Your next question comes from line of Christopher Nolan of Oppenheimer. Please proceed. Christopher Nolan - Oppenheimer & Co: Hi. Thanks for taking my call. Should we expect the percentage of construction loans relative to total loans to that decline in the coming quarters?

No, I don’t think so, because we continue to dispersed both projects who are in midst of it. So, I think that… actually my sense it that likelihood would actually increased by the end of fourth quarter. But then as I said earlier, I would expect that maybe in mid 2008, you may start seeing a reduction of the balance, because if we are not booking much now and going forward in future because not many people are doing anything, then more likely that the new origination would not be enough to outset against the pay-off. So, I would expect that by 2008, that’s going to happen. But as of today, I look at it, is that the continued … when we originate these loans, a year or two years ago, they still being dispersed on the monthly bases. So, I would expect by fourth quarter, there is likelihood that that may still be some increase, but I am not sure, because you never know sometimes some projects pay-off really fast. Christopher Nolan - Oppenheimer & Co: Great. Thank you very much.

Thank you.

[Operator Instructions]. Your next question comes from the line of Jennifer Demba, SunTrust. Please proceed.

Good morning.

Good morning.

If you cover this, I apologize. But Julia, I was wondering if you could give us the… you mention the Empire residential construction portfolio is about $124 million. What’s the entire portfolio?

The residential construction outstanding balance is about $888 million and that represent about 55% of the total construction balance, 45% non-residential, 55% residential. And the Inland Empire is $124 million, about 14% of the total residential compared to $888 million.

How much of that $888 million is acquisition and development versus single family homes or condos?

Most of the $888 million would be condos and single family residential, very few acquisition development land loan.

Okay. And just one more question on that topic, Dominic or Julia, are you seeing any other geographic sub-markets that give you cause for concern other than the input Inland Empire at this point?

Not in our portfolio, I mean in terms… because we are… we covered the geographic area primarily in California. And at this stage, I think that in terms of… for a sudden change of… I mean evaluation in terms of the single family of home market really are primarily restricted to the Inland Empire area, and I think for a good reason. There is sort of like big price cut comes from our new home developments. Only Inland Empire have a lot new home development and they are major builders. Major companies always like to take a big charge-off, so, that they can get it over with and then start booking a lot of income the next few quarters, that kind of stuff. And so… but if you talk about small developers, it's their money. They are not just going to go ahead and let it go. It’s their money. I mean they got to work very hard to make sure that they get their money back. So, I think that if you talk about that in the Inland Empire because there are major builders there who are taking major charge-off and stuff like that so that the market value is really going into a see-saw balance. It’s no different that if you look at right now commercial paper on Wall Street it’s going haywire because nobody wants to bid because you don’t know what the price is. And that’s kind of happening in the Inland Empire. But when you’re getting to like the City of Los Angeles, the City of San Francisco and the San Gabriel Valley where we have the bulk of our branches. All the developers can do in this area is just a little bit of initial, on a little plot of land they can build maybe 10 homes, 20 homes and stuff like that. But whenever in that kind of situation you do not have a neighbor who is a major builder, who says I am doing a massive fire cell at 20% discount and if you don’t then you can’t sell. You just can’t find these big builders. So, like… right next to you, adjacent to you who are selling like 300 homes and they have to get out in a heart beat. So, whenever you have that kind of situation, now the builders are doing 20 homes, 40 condos in West Los Angeles and stuff like that, they do have a lot more leverage in terms of while there is the demand I know that the buyers are now saying that, well, prices are supposed to come down because all the new papers say the price needs to come down. I need a bargain. So therefore, the developers now in West L.A. or maybe in San Francisco may come in and say okay I’ll give you 5% discount but you still need the home, I do need to sell and then I just get the deal done. I think you see more of that happening in the urban area but when it comes to in the newer developed areas that have a lot of land have a lot of big builders and that there situation maybe different. So, that’s what we see right now.

Thanks a lot. I appreciate it.

Thank you.

We have a follow-up question from the line of Andrea Jao with Lehman Brothers, please proceed.

Hello, again.

Hi.

Could you tell us when conversion of Desert Community scheduled for in? What remind us the cost savings? Talk about expense growth after that.

It will be the first week of November that we will consolidate and convert all the systems to the same platform. We expect some cost saving it’s not a tremendous amount of money, but then there’s some… there have been duplicative expenses by running two different systems.

Is it to early to ask about the expense growth projections and drivers for 2008?

Yes, I think so.

Fair enough.

But like just the likelihood is… we… if we don’t experience high growth we probably will make sure that we control the expenses well.

Yes, I think that one thing that you can expect is that we just do logical, common sense stuff. So, if we talk… we spend a lot of time talking about these residential construction loans and real estate market… I mean residential real estate market, when the market continues to effect the economy, obviously we have to… we would expect to have slower growth, and therefore, expense will be tightened up. And but if this is just a blip [ph] for a two quarters kind of situation and thing going better again and we start experiencing the kind of growth similar that we’ve had in the past and then we’ll expect that we will need to put invest in people and continue to provide infrastructure to support that kind of growth. And so everything just grows proportionally and logically and that’s what we’re going to do. And our plan is always that we would talk about the 2008 sort of like guidance at the fourth quarter with these times. So, it will be January of 2008.

Okay. Great. Thank you, again.

You’re welcome.

And your final question is a follow-up from the line of James Abbott of FBR Capital Market. Please proceed. James Abbott - Friedman, Billings Ramsey & Co: Hi, again. If I can focus on little bit of positive for a second here. There has been a lot of dislocation in the jumbo mortgage market and particularly in California, that’s a very important piece of the market. If here is something that you have thought about doing strategically to get involved there or may not be permanent involvement, but may be a six months to 12 months opportunity here. Is there something that you consider there?

Jumbo single family apply this low loan to value because we just like… like our portfolio high loan to value. So, there are certain markets of people that have 60% or 65% loans to value that have come to us, but difficulty about like a jumbo market is that we do not want to portfolio 30 years or 15 years. So, what we offered is jumbo that the portfolio will be 3 years or 5 years or 7 years fix at most. So, what have just some… it’s not going to be something, it’s a dramatic amount.

It will be immaterial. The reason is that when you do mainly adjustable rate there only so may that you can capture and if we do want to take a manage of this sort of like a current opportunity to actually do a lot more origination for these fixed rate loan that we will need to build a much bigger infrastructure to support the secondary market operation. Problem is that as we have already seen. Mortgage business like farming, it just go by seasons and we are just not going to be very comfortable to build up an infrastructure to support the business that maybe another time it will go another direction and therefore it would effect our sort of consistent core earning. So, that is an area that unfortunate for us. I think that we will pickup some additional business, but not going to material. James Abbott - Friedman, Billings Ramsey & Co: Okay. All right. Thanks again. I appreciate your comment.

And as that was your final question, I would now like to turn the call back over to management for closing remarks.

Well, thank you all for joining us for the call, and I look forward to you talking to you again in January of 2008. Thank You.

Thank you for your participation in today’s conference. This does conclude the presentation. You may now disconnect. Have a great day.