Jul 16, 2009
Executives
Irene Oh – Senior Vice President Investor Relations Dominique Ng – Chairman of the Board, President & Chief Executive Officer of the Company and the Bank Thomas J. Tolda – Executive Vice President & Chief Financial Officer of the Company and the Bank
Analysts
Dave Rochester – FBR Capital Markets Aaron Deer – Sandler O’Neil & Partners Ken Zerbe – Morgan Stanley Lana Chan – BMO Capital Markets Joe Morford – RBC Capital Markets Julianna Balicka – Keefe, Bruyette & Woods Jennifer Demba – Suntrust Robinson Humphrey Jeannette Daroosh – JMP Securities
Operator
Welcome to the second quarter 2009 East West Bancorp earnings conference call. My name is [Shaquana] 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 this conference.
(Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Ms. Irene Oh, Senior Vice President.
Irene Oh
Thank you for joining us today to review the financial results of the East West Bancorp for the second quarter of 2009. In a moment Dominique Ng, our Chairman, President and Chief Executive Officer will provide highlights for the quarter.
Then Tom Tolda, our Executive Vice President and Chief Financial Officer will review the financials. We will then open the call for 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 & Exchange Commission including our annual report on Form 10K for the year ended December 31, 2008. 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 Dominique.
Dominique Ng
Yesterday afternoon we reported a net loss of $92.1 million and the loss for the quarter was primarily driven by the $151.4 million provision for loan losses and the $37.4 million write down on our trust preferred securities. The increased provision was a result of our combined and continued aggressive efforts to identify, resolve and sell the problem assets.
While the provision is substantial, we made great progress in reducing our credit risk profile which I will discuss in more detail later. During the quarter we completed our own comprehensive stress test.
We have been conducting stress tests for our loan portfolio regularly for the past two years but with the public release of the [SCAB] Guidelines we tailored our stress test to conform to [SCAB]. The result showed that with an additional $101 million we would have sufficient tangible common equity to maintain a tangible common equity to risk weighted assets ratio of 4% under the more adverse economic scenario as required for the 19 stress test banks.
As such, we took immediate steps to boost tangible common equity by securitizing loans and exchanging preferred stock in to common stock. These actions raised our tangible common equity level today by [$102.9] million and in addition to this we raised another $27.5 million in capital through a private placement of common stock two days ago.
In total we increased capital by $148.4 million, $47.4 million above the cushion recommend under the stress test. With this capital cushion we believe we are well positioned to withstand this prolonged economic downturn and challenging credit environment.
For all these other regulatory capital ratio even under the more adverse situation we are still substantial above the minimum requirement. Now, I would like to provide you with more details regarding the great strides we have made to reduce our risk profile during the second quarter and our strategy for the remainder of ’09.
First, it is important to remember that East West loan portfolio is not plagued by prime mortgages, option ARM loans or consumer debt that is such a widespread problem for many in our industry. The areas of our portfolio impacted by the credit downturn have been contained mainly in our land and construction portfolio which we have worked aggressively to reduce for the past two years.
Since the start of 2008 we have decreased our total exposure to land and construction projects by $1.1 billion. This is an impressive accomplishment given that our total loan base is only $8.5 billion and in comparison to many of our peers that had great difficulty paring down their exposures.
In the second quarter we continued to aggressively identify, resolve and move problem assets off the balance sheet. During the quarter we sold $55.8 million in real estate owned at $166.3 million in loans for a total of $222.1 million.
As of June 30, total real estate owned assets were $27.2 million, a 30% decrease from the previous quarter. In addition, the total allowance for loan losses increased to $223.7 million or 2.62% of total gross loans as of June 30.
During these challenging economic times we believe that it is critical to maintain a strong allowance for loan losses. Also in the second quarter, we significantly ramped up our efforts to sell problem loans.
This resolution approach was primarily utilized for loans where the guarantors have ran out of liquidity and the project was not complete or situations where the project may be complete but because the borrower had filed for bankruptcy we had reason to believe that the loan would not be resolved in a timely manner. We sold a total of 70 notes, or $166.3 million during the quarter at an average loss of 20% or about $33 million from carrying value all of which is included in the charge off recorded in the second quarter.
Although it is painful to take substantial charge offs on these sales of loans that largely still have strong loan-to-value, we strongly believe that as the credit cycle continues problem assets do not age well and that quickly disposing of these loans was the best course of action to limit and reduce our losses on these projects. Additionally, as a bank focusing on community lending, we are committed to working with our borrowers and home owners whenever we believe that with just a little help the borrower will be able to make the payments and that future collectability of the loan is certain.
As of June 30, 2009 we disclosed that we had a total of $80.9 million in modified and restructured loans out of which $68.7 million were AB note restructures. In our earnings release we provide substantial detail on the AB note restructures and I want to point out that the vast majority of the loans were current and performing before and at the time of the restructure.
As such, we have good reason to believe that had the restructure not occurred the loan would still be paying as agreed. I would like to emphasis that the restructure in to AB notes was not the reason for the decrease in the non-accrued loans as the vast majority of these loans were all current and on accrual basis.
In this AB notes the original loan was restructured in to two notes where the A notes represent the portion of the original note which allows for an acceptable loan to value and debt coverage ratio on the underlying collateral and is expected to be paid in full. The $68.7 million balance disclosed as the NPA, non-performing assets is the A note only.
The B note represents the portion of the original note loan which was the short fall in collateral value and was fully charged off during the year for the total amount of $23 million. For all these AB note restructures the A notes have market interest rate and normal terms.
These loans are all performing and continue to accrue interest today. Under generally accepted accounting principles, as of January 1, 2010 the new calendar year, all of these loans will no longer be considered trouble debt restructure.
But, for the remainder of the year we will have to live with the short term pain of the artificial increase in non-performing assets that this accounting rule has caused. However, by taking the charge off and increasing non-performing assets in the current period we are permanently altering these loans for better long term performance and collectability.
Additionally, most of the AB restructures were performing residential construction loans where the borrower decided to temporarily rent the properties while waiting for the market to recover. Instead of continuing to renew the loan because they are current, we have obtained appraisals valuing the property as apartments instead of condos ensuring that the properties cash flow had good acceptable LTV, loan-to-value, and then wrote off the short fall value.
It is interesting to note that for many of the properties, the original loan cash flow however as market prices have fallen the loan-to-value as an apartment versus a condo was over 100%. So, we are confident that these unusual market dynamics will not last and we will see recovery from all of these loans.
To summarize my comments on the actions we have taken in the quarter to reduce our overall credit risk profile, I will spend a few moments discussing delinquency trends. We have achieved a lot of positive momentum with a substantial reduction of delinquent loans.
In particular, early stage delinquencies have decreased substantially with loans 30 to 59 days delinquent decreasing $130.9 million or an impressive 69%. With our large capital cushion and strong discipline in dealing with problem assets, we are comfortable that we can continue reducing our credit risk profile quarter-by-quarter.
For the remainder of 2009 we will continue our aggressive efforts to further reduce delinquencies, move problem assets off the balance sheet and provide adequate allowances for loan losses. I will now turn the call over to Tom to review our second quarter results.
Thomas J. Tolda
I’d like to start with a summary of the results for the second quarter. The loss for the second quarter was $92.1 million largely driven by the $151.4 million provision for loan loss and the $37.4 million non-cash charge for other than temporary impairment on our pool trust preferred securities.
Also negatively impacting earnings of a onetime nature was a charge for FDIC’s industry wide deposit insurance special assessment for $5.7 million. The elevated provision for loan losses was largely driven by $133.9 million in net charge offs during the quarter.
As the net charge offs were substantial to second quarter I’d like to spend a few minutes drilling down on some specifics that may not be so readily apparent from the press release tables. During the quarter we charged off $14.1 million for single family loans, a $10.2 million increase from first quarter.
This entire increase in the single family charge offs of $10.2 million in the second quarter was driven by a large onetime bulk sale of single family loans. Although we have not utilized bulk sales in the past, in the second quarter we decided to take a more aggressive approach to reducing problem loans.
Moving to the multifamily portfolio, overall credit quality and charge offs on multifamily loans remain high. I’d like to note that the increase in non-performing multifamily loans was solely due to the AB notes which are reported as non-performing loans.
I would like to reiterate that for 100% of these AB loans which were originally construction loans that we have reclassified as multifamily loans, the borrowers were current and had been showing strong payment performance for many months. In some situations construction was completed in early 2008 and operator had been current since then.
Aside from the AB notes classified as non-performing loans there were no substantial increase in charge offs quarter-to-quarter. Regarding income producing CRE loans, total charge offs for this loan category totaled $12.5 million, up from the $2.8 million in the first quarter.
The $12.5 million in CRE charge offs for the quarter, $6.3 million or 50% of the total charge offs related to one loan relationship. In the first quarter earnings call we mentioned that we forced in to non-accrual all loans related to one borrower that had filed for bankruptcy.
During the second quarter we sold almost all of our exposure to this borrower. After the borrower filed bankruptcy we obtained updated collateral values for all of these properties which showed that even in this market collateral values were substantially higher than the loan balances.
However, we believe that given our expectations of the length of the time the bankruptcy proceedings would take, we sold them at a loss in the second quarter to move them off of our books. Excluding the impact of these sales and the resulting charge offs, the total CRE charge offs were $6.2 million or $3.4 million increase from prior quarter.
Moving on to the desecuritization in the quarter; we desecuritized $636 million of private label single family and multifamily securitizations comprised of loans that previously were all originated by us and had been securitized in 2006 and 2007 for additional liquidity purposes. All of these securities were retained by the company and held in our available for sale investment securities portfolio.
This action was taken now as the mark-to-market adjustments we were taking on these securities were based on price points observed in the general market for MBS and were not reflective of the better credit quality of the underlying loans. These marks were accumulating in OCI and negatively impacting our tangible common equity.
The loans we desecuritized have total delinquency at about 1% as of June 30, 2009. By desecuritizing we were able to reverse OCI and the mortgage servicing asset back in to the basis of the carrying value of the loans without P&L impact.
Reversal of OCI contributed $30.6 million to increased tangible common equity. This transaction will also reduce operating costs by approximately $1 million per annum as we will no longer need to pay for the insurance wrap provider and the custodian of the securitizations.
To achieve these benefits we did need to record in the second quarter a $5.4 million after tax extraordinary loss from the setup of a loan loss allowance for these loans. Shifting gears a bit, net interest income in second quarter reached $88.3 million, $8.6 million or 11% over prior quarter as net interest margin grew 24 basis points from first quarter to 2.98%.
As we mentioned in last quarter’s call net interest margin is expected to continue to move up as higher cost CDs mature, new core deposits come on at lower costs, we continue to pay down FHLB borrowings and higher yields are realized on investable funds and new loans. In the second half of the year $450 million of FHLB borrowings will mature with interest rates hovering around 4% to 5%.
We currently estimate that net interest margin in the third quarter to range from 3.10% to 3.15% and fourth quarter margin to range from 3.20% to 3.25%. During the quarter we again successfully increased total deposit with growth in the second quarter of $204.8 million or 10% on an annualized basis.
This increase in deposit was driven by a $203 million increase in non-CD deposits. Since late last year we have continued to actively promote deposit campaigns in our retail branch network and throughout our commercial deposit platforms and are having very good success with these efforts.
Cost of deposits for the second quarter of 2009 was 1.47%, a 34 basis point increase from 1.81% in the first quarter. For the month of June 2009 the cost of deposit was 1.39%.
On the loan front, gross loans outstanding at June 30, 2009 totaled $8.5 billion up $465 million from March 31, 2009. The increase in total loans was largely the result of the $636 million of loans put back on our books from the desecuritization.
Excluding the increase from the desecuritization, our total loan portfolio declined $171 million to $7.9 billion. This decrease was most notable in the portfolios we needed to decrease, that is, construction loans declined $210 million or 18% while land loans declined $65 million or 12%.
The rest of our portfolio including income producing CRE, C&I and trade finance loan balances remained stable while single family mortgages and other consumer loan balances increased slightly. As Dominique mentioned we are continuing to work the construction and land portfolios rigorously.
Our loan to deposit ratio after we bought back the $638 million of loans through the desecuritization was 98%, a level we are comfortable with for now. Moving to the investment portfolio with the desecuritizations, our overall investment portfolio decreased to about $2.8 billion from the $3.1 billion at March 31st.
We continue to maintain strong liquidity and flexibility in our investment and have kept most assets relatively short term in duration. During the quarter we recorded a $37.4 million charge through P&L for other than temporary impairment in our pool trust preferred securities.
The non-credit related OTTI securities totaled $63.3 million during the second quarter which was recognized through other comprehensive income. The higher OTTI this quarter was brought on by deteriorating market conditions as many more small banks deferred or defaulted on their trust preferred debt this quarter.
Collateral values diminished, cash flows deteriorated and estimates of future deferrals and defaults were increased. Pool trust securities we own were also all downgraded in the second quarter to below investment grade securities.
As such, these securities are no longer eligible for a 100% risk weighting capital charge and have a dollar-for-dollar capital charge. With the net loss for the quarter and the additional capital required due to the downgraded pool trust securities, regulatory capital levels decreased from March 3, 2009 levels.
However, with the impact of the private exchange of the preferred stock and the recent $27.5 million common stock investment from two of our customers factored in, tangible common equity to total risk weighted assets increased to 7.25% on a pro forma basis. The impact of these exchanges and common stock issuances will be included in our third quarter results as the transaction did not settle until after June 30, 2009.
While we’re on the subject East West has always maintained its capital conservatively, has always managed its capital conservatively and we’ll continue to do so as we believe this is in the best interest of our customers and shareholders. At June month end East West continues to be very well capitalized with quarter end total risk based capital of 14.28%, tier I risk based capital of 12.25% and tier I leverage capital of 10.38%.
With the completion of the $90.3 million in private exchanges and the $27.5 million common stock raise, we believe we are in an even stronger position with regard to our capital. Dividends have been declared in the quarter and will continue to be reviewed each quarter in light of earnings and the environment we are operating in.
Non-interest income was down $11 million from the first quarter of 2009. Excluding the impact of impairment write downs in our pool trust preferred securities, the non-interest income for the quarter was $9.6 million compared to $10.5 million in the prior quarter.
Non-interest expenses in the second quarter totaled $57.9 million, an increase of $6.5 million from first quarter 2009. The increase was due to the FDIC industry wide deposit insurance special assessment of $5.7 million and an increase in OREO expenses.
Excluding these credit cycle costs, core operating expenses decreased $845,000 from the first quarter. We continue to focus on increasing operating efficiency for the remainder of 2009 and believe that further cost containment in 2009 is achievable.
With that, I will now turn the call back over to Dominique.
Dominique Ng
Again, I would like to thank everyone for joining the call today and for your continued interest in East West. I will now open the call to questions.
Operator
(Operator Instructions) Your first question comes from Dave Rochester – FBR Capital Markets.
Dave Rochester – FBR Capital Markets
As you’ve seen appraisals come in on troubled CRE or commercial construction loans, could you ballpark a rough range for what you’re seeing in terms of collateral value deflation on average? And, if you can break the land component out of there that would be great.
Dominique Ng
In terms of the current appraisal value versus the original value and how much in duration and so forth?
Dave Rochester – FBR Capital Markets
Exactly, just for the commercial construction projects and CRE.
Dominique Ng
In commercial construction and CRE we have not see too big of a decline. I think it varies obviously, I think for commercial construction often times it depends on the projects.
Most of the construction that we have on the commercial side they have anchor tenants, strong credit tenants and when these leases are still going forward – the appraisal have come back in not really reduced in value much at all. I think usually what we will find is that if there is any commercial project that if they initially intended to have certain tenants and those certain tenants are not coming in and now it goes from a supposed to be fully leased tenant type of project has turned in to maybe a half empty type of project then I think the appraisal value drops substantially.
Dave Rochester – FBR Capital Markets
Could you also give some color on the losses in the commercial construction book as to product type and region and possibly what the severities were on those?
Dominique Ng
Are you again, looking at just commercial construction and commercial real estate?
Dave Rochester – FBR Capital Markets
Exactly, I’m just trying to figure out is that primarily retail on the commercial construction book and then as to location if that’s in Inland Empire, LA County?
Dominique Ng
I think again, Inland Empire has a little bit more stress than do the rest of – specifically, we had a couple of projects in Sacramento that we had some issues then in Inland Empire we have some issues. So far, in LA still holding up pretty good.
Now, we have taken losses due to unusual circumstances as we mentioned earlier. We may have a property that even today appraised at a value substantially better than the loan balance but just because of a bankruptcy issue and we do not want to sort of like prolong this NPA on our books and we decided to sell this loan at a discount.
So we have kind of artificially taken a charge off when in fact based on most current appraisal values we still see that they’re holding up pretty good. So, I would say that for the commercial real estate and also the commercial construction is still somewhat to a certain degree mirror the land and residential construction that is that Inland Empire or maybe certain area in Northern California, Nevada, those places tend to be more distressed then Los Angeles County.
Dave Rochester – FBR Capital Markets
What would be your expectation and I know it’s virtually impossible to predict this, for the provision going forward I know you’re going to continue to be aggressive to get the NPAs and delinquencies off of the balance sheet which is great but are you expecting to see another number north of $100 million or so in terms of provision for the third quarter as you guys try to clean up any other areas of weakness?
Dominique Ng
At this moment I would say it is possible, it depends on what strategy that we would take when it comes down to dealing with non-performing assets. One good example is sort of like to put it in to perspective, our total delinquencies is only $290 million.
Obviously, most of those loans that are delinquent they eventually come back to current however, what we see right now is that we have opportunities that we can sell loans, even if they are not yet distressed in terms of chronic delinquency or maybe have collateral value below the loan balance and so forth but if we see that there’s a type of properties that potentially in the future that may still cause us harm and then we have interested buyers that would be willing to strike a deal with us, we may still sell some of those loans. Because of the willingness and aggressiveness to charge off or move potential problem loans and problem loans off the balance sheet there is a likelihood that we may have another repeat of $100 million.
But if we just look at existing current NPA delinquency and then just look at it in terms of okay what is the potential losses that may incur, I think obviously it looks hard. The reason is that we always every quarter charge down or maybe provide full reserve to all of these existing loans that we have on the books.
So, every single non-performing loans that are on our books that if there are collateral deficiencies, we have already provided a specific reserve or may have provided a charge off to it. So, under that circumstances I think it will be challenging but I think as we have done in the second quarter, that one particular borrower that had over $55 million of loans with us with a total of 11 loans and 23 pieces of collateral that the LTV was much lower than the loan balance but we have taken the approach that it is better than boot them out then spending the time dealing with their legal proceeding for the next year or two.
When we take this kind of action I think we can have some more additional charge offs. So, we are taking a position that we will be actively looking out for this type of scenario and take the charge off, move these potential problem loans off the balance sheet.
However, at this stage I think it’s too early for us to tell one way or another what we will end up getting at the end of the third quarter.
Operator
Your next question comes from Aaron Deer – Sandler O’Neil & Partners.
Aaron Deer – Sandler O’Neil & Partners
Dominique, you seem more comfortable with your capital levels following the actions that you’ve taken recently here. If you could raise more capital at say the 550 price that the private placement was done, would you do more?
And, if so, how much would you be willing to take on at that level?
Dominique Ng
It’s possible. I think that at this stage right now I think that for one we just started the conversion of the convertible preferred and we’re fortunate in the way that we have a few large holders that basically help a big percentage so when they approach us about interest in conversion it makes life easier that we can just talk to only a few of them when they come talk to us and then we get that taken care of.
I would imagine that there will be more once now that we filed the 8K, I would imagine that there will be more to come so we would expect that we might be able to pick up even more convertible preferred to exchange to common, that’s one part. Then, whether we will do some more common stock raise and I think that depends as obviously we want to take a look and see what the market is today.
Secondly, we want to sort of look at what we’re going to do with the stock that we raise. Now, there are quite a bit of good opportunities out there right now in terms of potentially originating higher yield much safer loans in today’s less competitive environment.
So, in that regard I think it makes it attractive to go ahead and raise some more capital so that we can be even more aggressive in building up our core profitability which is now going pretty strong. So, in that regard I think that makes sense.
Secondly, more capital more cushion is only going to help us even more to put these problem loans behind us. So there are good opportunities there and we’re definitely looking to potentially what makes sense, what’s available.
What we try to do is do a balance between what’s best for our shareholders and also what’s best for our strategy in terms of going forward in the future. We will continue to actively evaluate these opportunities to see what we need to do.
The nice thing about it right now is that we’ve got enough through the stress test, all these other regulatory capitals, we’re substantially above the most adverse situation and even with the tangible common equity ratio we now have $48 million of cushion so we are already in pretty good shape but we will continue to evaluate this opportunity and see what we can do.
Aaron Deer – Sandler O’Neil & Partners
Tom, I was wondering if you could give a little bit more color behind the AB note structures? With the A notes what is the minimum debt service coverage and the max LTV on those that you guys target?
Thomas J. Tolda
Irene do you want to take that?
Irene Oh
It varies on the property but obviously for the loans that were residential construction loans that we converted in to apartment loans it’s got a debt service upwards of one. We also we found in these situations it’s interesting where often times even if the original loan amount the property would have debt serviced it’s just we’re in this environment where the LTV is upwards of 100.
There are other situations too, the residential construction loans that was the bulk of it, there are other situations where we did the AB notes where we actually got full interest reserves from the borrowers.
Dominique Ng
Just to give you a little bit more color, when the borrower completed his condos due to the market conditions they decided to lease these condos out instead of like selling them. Why did they do that?
Because they can afford to do so. Frankly, at the time they were leasing these condos out obviously, when they do one condo lease at a time their insufficient cash flow from the income to service the debt, these borrowers have been paying out of pocket.
They have been paying out of pocket so these loans have always been current but through borrower paying out of pocket. Then eventually, these properties were fully leased and obviously with the fully leased rental payment there is enough cash flow to service the debt at that point.
If we wanted to we could have just renewed the loans and based on the ability to service the debt from the net operating income of these rentals and also knowing the borrowers have full guarantees and have demonstrated the ability to pay while the property is not in cash flow, I think all of them are good characteristics for us to justify renewing the loan. However, in today’s environment now we go an order an appraisal when we do the renewal and instead of appraising it as a condo we appraise it as an apartment and clearly the property value for a condo, the kinds of material being used and all that kind of stuff, it would cause the apartment value to be substantially less and in that regard it would create a situation that while everything looks perfect but we have about 100% loan-to-value.
So, in order to ensure that we are not every going to be criticized in terms of are we lending to a borrower with a collateral value that is underwater that we should debate about whether this should be accrual or non-accrual, we created these AB notes. The A side now have loan-to-value that is meeting our regular underwriting guidelines and have common market interest rate, etc., etc.
Then, for the B portion while the customer still is obligated and still paying, we charge off the entire B portion proceeds. That’s what we have been doing on these AB notes.
We think that once we’re past this calendar year they should all be no longer classified as troubled debt restructures.
Operator
Your next question comes from Ken Zerbe – Morgan Stanley.
Ken Zerbe – Morgan Stanley
Don, just on the loans that you’re selling are you finding that you’re selling more I guess half built or what’s called vertical properties, or land, or some combination thereof or are you trying to hold more of the land because of the lower bids that you’re seeing out there.
Dominique Ng
No, we’re selling everything. Basically, it takes a little bit of time to also sell these properties.
Anything that is no good on the books we try to sell. Now, we have obviously a much harder time to sell participation loans.
Throughout the years we bought one small bank a year and usually smaller community banks like to be participating banks of other community bank deals. So, when we are these small minority participant of let’s say a syndicated loan – let’s just say a syndicate loan of $20 million with East West holding $4 or $5 million.
A classic example would be from Desert Community Bank which has a lot of participation loans, they’d be holding like $4 million on a loan from another community bank or maybe a $3 million loan on another community bank, or a $6 million loan on another community bank. These types of situation, since we’re the minority participating bank we cannot call the shots.
Often times when you have the other banks who do not want to make a move or do not want to take losses or do not want to recognize the current appraised value or so forth we sometimes get stuck. It’s harder to sell our own portion.
But, everything that we are in control, which is most of the loans, that we are in control that we’re trying to sell them. We pretty much whether they are unfinished condo project or land in San Bernardino, whatever we can sell we sell.
Now, whatever we haven’t been able to sell for the second quarter we will continue to sell in the third quarter. What we’re trying to do is write down the amount as much as we can when we see it but we will continue the effort to sell.
In a way it’s kind of making it easier to sell in the next quarter because when you see that it’s not selling and you think despite the most current appraisal we got we just say, “Well, just write it down a little bit more because it’s not selling.” Then the next quarter, finally we got it sold.
So, we hope that in the third quarter we get some great results again in terms of getting out of these REO and problem loans.
Ken Zerbe – Morgan Stanley
The last thing, can you just remind us where you’re carrying the TruPS at as a percentage of original par value?
Thomas J. Tolda
Ken, current we’ve got a market value on these of $15.8 million and that was versus a original book value of $122 million. That’s I guess about $0.16 on the dollar.
Operator
Your next question comes from Lana Chan – BMO Capital Markets.
Lana Chan – BMO Capital Markets
Just a couple of quick questions on the credit quality, I might have missed it but what were the write downs on the OREO sales this quarter?
Irene Oh
Lana, the total write down on OREO sales were about $8.5 million so roughly 15%.
Lana Chan – BMO Capital Markets
You usually provide this in your 10Qs but do you have the net inflows in to non-performers this quarter?
Irene Oh
I do have that information. We have found [inaudible] this quarter we are very fortunate in the fact that the net inflows dollar wise were substantially lower but overall it has remained relatively consistent in that fact that net inflows are about 60% and the other ones are remaining and we’re moving them off fairly quickly.
Lana Chan – BMO Capital Markets
Do you have the dollar amount because I think it was $177 million last quarter?
Irene Oh
Of the $162 that we had at the end of June 41% were there from the end of March and that was about $66 million and the remaining were net inflows.
Lana Chan – BMO Capital Markets
When was your last regulatory exam for safety and soundness and your credit exam?
Thomas J. Tolda
The full scope fed exam is conducted in August, August of ’08 and we’re anticipating another one shortly.
Lana Chan – BMO Capital Markets
My last question is about the just overall California state budget and the crisis there, what is your exposure to the muni and state in California whether on your securities portfolio or on the lending side?
Thomas J. Tolda
Lana, we don’t have much in the way of exposure to California in terms of the security portfolio but I don’t have that amount quantified at the moment but I can get back to you.
Dominique Ng
We have a very minimal amount of muni and then they also are just not in California so it’s going to be very, very, very immaterial from an investment securities standpoint. In terms of IOU we’ve actually been receiving them but our customers just don’t have a lot of business with the government except a couple of them in the Desert Community Bank area.
As of today I think we have total just less of $1 million. Every day we are taking IOU from our customers but cumulatively even – as of yesterday, still just shy of $1 million.
Operator
Your next question comes from Joe Morford – RBC Capital Markets.
Joe Morford – RBC Capital Markets
A lot of my questions have been asked but I guess I’ll just follow up on a few different things. First, just following up on Lana’s question, with the new inflows that you saw were there any kind of notable trends with any spread of deterioration by geography or loan type or anything like that?
Dominique Ng
Not really. I mean, we have not found anything that I call new trends that cause us to have to redirect our focus.
In fact, the problem loans that we identified in June in 2008, these land constructions that during that time when we looked at the appraised value many of them were still quite sufficient but as time has gone by and one-by-one when the values just keep dropping, and dropping, and dropping so some of them that were doing fine at the moment in 2008 when we do a full complete examination and review of these loans there are some of them we consider to be okay but now not too okay because the value have continued to drop. So, we have that.
We also have loans that we identified that have sort of like certain characteristics of likelihood of default but the loan was either paying as agreed because customers just kept carrying it for an extended period of time and now becomes a problem. But, it’s not something that out of the blue that gave us some shock.
It was something that we were hoping, “Wow, gee, if the economy does not go any worse things are going to be really good.” However, the economy went much worse so those kind of like on the borderline, pretty much everything on the borderline all went bad.
That’s the reason why despite the fact that we have taken some pretty aggressive provision and charge off last year in terms of making sure that these loan are fully reserved or charged off, etc. we still end up having to do more.
So now, we’re taking the approach of just getting rid of them. Now, we do have what you’ll find is that on the construction and land loans despite the fact I mentioned earlier that we have pared down the exposure including commitment and everything by over $1.1 billion since January 2008, what we have today is that we actually have resolved more construction and land loans than what we have shown on the balance sheet.
Let me explain why; because when we get rid of a existing non-performing land loan in today’s environment since nobody else is doing land financing. So, we actually finance some of these new borrower who have substantial liquidity who bought it at a substantially huge discount and they set of interest reserves, sometimes there is from one year to three years.
The characteristics of these land loans that we booked to facilitate sales have substantially, substantially better quality not only to our land and construction loan but substantial better quality to all loans in our entire loan portfolio. So, these new loans that we booked to help the new investors to buy unfinished construction project to acquire land that they can hold for the next five years before they do something, all of that kind of stuff that we’re doing right now the credit quality is actually substantially better than all the other loans.
However, since we’re still financing them there is still that residual balance shown in those portfolio so when one looks at these construction loans and land loans and let’s say they still have like in the second quarter, they still have like $900 million of construction loans and about $400 million in land, one has to keep that in mind is that there are substantial of those amounts are new borrows. Then also, there is substantial of that amount has been reworked with existing borrower who have taken substantial pay down, or maybe add in new guarantors, or they may be paying down by selling some of these condo units and, etc.
So, I think the risk profile of our existing portfolio of land and construction is actually not only because the size is reduced that makes me feel better, I think the most important thing is that the overall risk profile has changed dramatically because there is not one construction and land loan that has not been reworked or dealt with simply because all these loans usually only have a one year to 18 months or at most 24 month terms. We start dealing with them since the second half of 2007 and at this moment pretty much everything has been dealt with one way or another.
Either they’ve been dealt with by us foreclosing on them or maybe before we foreclose we sell these notes. Or, we end up seeing the customer successfully complete the construction and then successfully sold these condos one unit at a time or we have a new borrower that comes in that make the loans substantially safer.
All of that I think gives us the comfort that these land and construction loans are holding up pretty good. From a commercial real estate standpoint, as of today if we exclude some of these isolated borrowers who because their land loan is getting in trouble and then they filed bankruptcy that because they filed bankruptcy their cash flow in commercial real estate got all tied in to one big giant portfolio that we end up selling them at a discount, technically at this point we have not seen some severe deterioration on our commercial real estate portfolio as the media and the market has indicated.
We still have our commercial real estate portfolio holding up pretty good. The hotel portfolio, industrial warehouse and retail strip centers and so forth, all of that together at this point are still holding up pretty good.
Industrial warehouse, whenever they became a problem it is always because it is owner occupied, owner user, C&I customers that in the business filed bankruptcy and then suddenly a owner user warehouse becomes an empty warehouse and because our interest is to dispose them ASAP we did not want to wait for the appraised value and then six months later to make sure we sell it at the appraised value, we wanted to dispose of it quicker and therefore we end up selling it at a lose. But, from an investor type of commercial real estate actually has been holding up quite well at this stage.
We are monitoring very closely, just the same thing we monitor our hotel loans very closely but interestingly enough except one or two hotel loans that really are construction loans because they are construction of a hotel that is barely finished and now have ramp up in their operation and they got in trouble but really are classified as hotel loans, accept for one or two of that kind of problem in a hotel portfolio, all our hotel loans that are sort of seasoned, every single one of them are performing as agreed. We don’t even have 30 day delinquency out of the entire portfolio.
So, while we’re watching it closely, we’re talking to these customers intensely about how they are doing, I think to a certain extent the very low loan-to-value that we originated on these loans at an average of about 50% to 55% of almost all these hotel loans and a very strong guarantors plus good operators, I think these combination of reasons have caused us to be still in a pretty safe zone today. Looking back in 2001, after 9/11 a substantial number of hotels were in delinquents in the entire industry throughout the United States, we did not have one hotel loans that we foreclosed on.
We did not have one single dollar in charge off in 2001. Now obviously, the market condition and the economic condition was substantially worse today.
However, as of today we’re still looking pretty good.
Joe Morford – RBC Capital Markets
I guess to clarify one thing that you said earlier it sounds like then most of the inflows in NPA that you’ve seen the last couple of quarters is really just further downward migration of previously identified problems and really there has not been much new inflow in to the classified and criticized buckets. Is that what you’re saying?
Dominique Ng
Yes, that’s pretty much the case.
Joe Morford – RBC Capital Markets
Then one last quick follow up, with the AB notes, did you essentially this quarter capture all of the kind of most eligible credits for that or should we expect to see a new slug of these kind of restructurings each quarter?
Dominique Ng
I think that we have enough what I call forced confused NPAs that we created and that we will just most likely stop right around here because on one hand while we think that this is the best solution, we end up taking – even though we took the charge off we know that the recovery will be substantial. See, we have two choices, we could have just take those condos and sold it to another potential investor.
The danger of doing that is we usually do not get a better price than when the loan performs, we may even get a worse price because the investor who buys – In fact, by the way most investor who bought from us are our customers. The investor who bought on these projects they want to do something with the projects.
There’s nothing more frustrating than for them to buy a performing loan because they don’t know what to do with them. It makes it very hard for them to foreclose or whatever because if they ever have to go to the judge it also becomes more challenging.
So, we may end up getting just the same kind of discount despite the collateral value is good and the customer is paying as agreed so because of that reason we end up not selling these types of projects and do the AB note. But, on the other hand we also need to recognize that if we keep doing more of that we will keep piling of NPAs and we send a confusing signal to the market.
So, what we did is sort of like one quarter we go in there and just look at all of this stuff and get it all taken care of. The good news is that even if we want to do more it’s going to be tough because most of the condo projects are at that completion stage.
In fact, many of them already have started selling them unit-by-unit. It’s very different than last year or the first quarter when we are still hanging in there and watching to see the customer trying to get to the finish line, most of the customers trying to get to the finish line.
Now, we have substantial number of these condo developments have passed the finish line and they’re now either waiting for certificates of occupancy or they have already have like 15 units in escrow and just have to sell them one at a time or something like that. So, when we’re in this stage we don’t think that we have as much opportunity to do as much of these types of things.
We may, we may do some more for single family mortgages. Clearly, there’s some deserving borrowers that have run in to hard times that we feel if we can just give them a little bit of a lift that we will be able to help them get through the cycle and these loan-to-values right now can get very out of control because appraisers today can come up with an appraisal value that may or may not make sense but once the appraisal value comes in if it is over 100% we need to do something.
So, we may still possibly do something for single family mortgages which usually the dollar amount will average about $200,000 a piece which is very different than these larger condo projects. So, all in all I would say that the total dollar amount of the AB note if increased at all – well, it would only increase because we cannot decrease it until January 1, 2009, if increased at all it will be very small.
I think what we will do is that we’ll continue to manage our balance sheet. One key thing that people need to keep in mind is that whatever trend that that happened in East West deteriorating, management will fix it the next quarter.
As you have seen last quarter, our delinquency went from 3.5% jumped to 6%, the total delinquency, most people would say, “This is a beginning of a problem with East West because it went from 3.5% to 6%, God knows when it’s going to go to 9%.” It will never happen at East West because we come to work every day to work.
When we see that delinquency ratio has gone up, it’s time for us to work it back down so now it went from 6% down to less than 3.5% for the total delinquency. The same thing for these AB notes, what we looked at is okay we think we can afford to do that much and we’ll leave it at that and then we might do it slightly more but then it depends on how successful we are in the third quarter with our problem asset resolution.
If we’re able to go out there and sell another $150 to $200 million of problem loans and REO, we may get the total delinquency and the NPA down even more substantially and at that point we may go out there and help some more borrowers in some regard. That’s the kind of balancing act that we do.
We will not be going in there and let’s say just work our NPA down to zero or something like that because when we see that we have room, it’s a calculation of comparing capital cushion, non-performing loans, market perception and what realistically works best from a balance sheet standpoint, from a customer relations standpoint, etc., etc., we look at all of those factors and we do whatever is necessary. In that standpoint I think we will make the right decision for next quarter.
Operator
Your next question comes from Julianna Balicka – Keefe, Bruyette & Woods.
Julianna Balicka – Keefe, Bruyette & Woods
I have a few quick questions, on the deposit growth, the $200 million deposit growth was nice to see, could you elaborate a little bit like roughly where it was coming from? Were you getting customers from other banks?
What was driving the good growth in core deposits?
Dominique Ng
Substantially coming from the branches. We have a promotion of bonus money market and we have basically brought in – in fact, in total now over close to $500 million between two quarters of these money market accounts.
They come from both existing customers and also a substantial amount from new customers.
Julianna Balicka – Keefe, Bruyette & Woods
Do you have a sense of where the new customers are coming from or are they just new customers at the branch?
Dominique Ng
You mean a sense of where they are coming from?4
Julianna Balicka – Keefe, Bruyette & Woods
Yes, are they like leaving the large banks?
Dominique Ng
Basically all over the place. There are banks that failed, I shouldn’t say banks failed, sometimes large banks have taken over, some very, very large banks in California and when that change happens there are more and more of these disenchanted customers of those acquired banks that decided to move on to other financial institutions.
I think that we are a little bit more visible now in California and particularly in Southern California. I shouldn’t say particularly Southern because in Northern California nine branches are doing an incredible job in terms of bringing in new deposits so for that regard I would say it’s not actually the visibility that we have in Southern California that’s making a difference because Northern California are bringing some big time growth.
So in that regard, I think that we are getting deposits just pretty much from large banks, small banks, any kind of size and then shape. I do feel that one of the reasons is that this campaign that we started in fact in the latter part of 2008 have one feature.
That is that we always in the past say that when we get this rate if you put in an amount that is at least let’s say $50,000 or something like that, by putting that threshold I think we dramatically reduced smaller customers to come in to enjoy a decent rate. We have taken that off since the beginning of the campaign and ever sense then I think more and more customers are coming to our bank because now you have smaller customers who never sort of get any kind of decent treatment from banks because most banks like to put in these high thresholds of dollars enough for them to enjoy the campaign rate.
We are giving them the luxury of, “Hey, as long as you bring the deposit in you get the same rate.” That has worked really well.
For that reason I think that has also contributed to the retail banking pretty nice growth. Beyond that, our commercial banking, the cash management team and the commercial banking officers have scored pretty big for the last few months from getting new commercial customers that are not credit drive.
I think one of the advantages that we have is when we have less focus on working on credit in terms of bringing new loans the account officers who are somewhat idle today because of a difficult credit environment allow them to put more focus on deposits. Now, all-in-all the commercial lending team has not had much luck in increasing the overall deposits because as much as they made a substantial amount of gain of new customers that are not credit driven they also lost deposits from many of the existing customers who are in the real estate business.
So, all-in-all there is an offset, new deposits offset against old deposits that decreased due to the very stressful economic environment. But, from a retail banking standpoint it’s just growth, growth, growth.
Operator
Your next question comes from Jennifer Demba – Suntrust Robinson Humphrey.
Jennifer Demba – Suntrust Robinson Humphrey
The $166 million of sold loans, I just wanted to clarify what was your loss on those versus the original loan amount?
Irene Oh
As Dominique mentioned in the prepared remarks, the loss at the time of sale was roughly about 20% to 22%. From the original loan amount, the loss was $50 million or about 32%.
Jennifer Demba – Suntrust Robinson Humphrey
Those loans you sold were all non-performing, correct?
Dominique Ng
No, not all of them are non-performing. I would say that the vast majority of them are non-performing.
So, we have loans that we just see the characteristics does not fit in to what we think our credit profile in the long run and when we had the opportunity we unload them. We also have loans that are 30 days, 60 days delinquent that we feel that it is better to get them off the books before it becomes NPA so it’s a combination.
But clearly, definitely more than 50% of them are NPA.
Operator
Your next question comes from Jeannette Daroosh – JMP Securities.
Jeannette Daroosh – JMP Securities
I have just a couple of clarifying questions, the first relates to the AB notes and I was wondering if you could provide a little bit of detail in terms of where these properties might be located? Then also, if you have a sense for what the absorption rate is in terms of making these fully leased up or getting to some lease up level?
Dominique Ng
In fact, the vast majority are three borrowers. In fact, they have multiple loans with us and in fact, I would say both borrowers have similar characteristics that is that these are condo projects that are in Los Angeles County, they vary from city-to-city in Los Angeles County.
None of these are what I call very distressed neighborhoods. I would say that even today they are all in decent zip code areas.
These are condos, apartments that they owned and they we just collectively do a restructure with them. One particular borrower may have maybe nine or 10 loans and another borrower may have nine or 10 loans and all of that we put together a restructure that makes sure that everyone of these loans that they have, the A note have good collateral value, good debt coverage ratio and market rate interest, regular terms, that we can underwrite it as a new loan today and then with the remaining B note, we charge them off.
The customer still has the obligation to pay both A and B but we just want to set it up in such as way so that to ensure that come January 1, 2010 these loans will be on the books as current loans since the B is already charged off any ways. That I would say is the vast majority of AB note.
Irene Oh
Just to clarify, these notes, the residential construction loans, they have been utilized as apartment loans for a significant period of time now it wasn’t that it just happened. So, as far as the lease up, most of them are fully leased, fully rented out.
That’s why we have the cash flow.
Dominique Ng
That’s why they had been sort of stumbling along. While they are always current, at times in 2008 I think the concern was they were current because the borrowers continuation of paying out of pocket to subsidize for the difference between the rent payment and the interest requirement.
So, we looked at it as we feel it is only appropriate that we wanted to once and for all and get these things clear and not put the customer and the borrowers at stress because they [inaudible] to continue to make payments even out of pocket. So, one good way of doing that is instead of just setting up six month renewal and every six months we watch them again we feel why not we just do a once and for all permanent loan.
But, the only way you can do a permanent loan is the LTV has to be appropriate and within in our guidelines, the debt coverage ratio within our guidelines and that is why these AB loans were constructed. But, at the time we did this AB note in the second quarter, many of these projects have already not only fully leased but have been fully leased for months and getting the kind of cash flow that is needed.
Jeannette Daroosh – JMP Securities
With respect to the REO that you sold in the quarter the almost $56 million, can you provide a little bit of detail in terms of the types of properties that were sold? Then also, who were some of the investors that acquired these?
Dominique Ng
We did a bulk sale for a bunch of single family mortgages. I’m sorry – only REO, Irene do you want to talk about it?
Irene Oh
For REO sales here I’m looking at the list here, it runs the gamut, all types of properties, all types of buyers. A lot of buyers of our loans and our REOs or problem assets are actually existing customers of East West also.
Jeannette Daroosh – JMP Securities
Then the $166 million, that was the bulk sale of the single family residential?
Dominique Ng
Only $20 million were bulk sales for single families. The other $140 million are land, construction and a little bit of CRE and all kinds of different stuff.
Operator
At this time there are no further questions. I would now like to turn the call over to East West Bancorp management for closing remarks.
Dominique Ng
Again, thank you for joining us for this call today. We look forward to speaking to you again after the closing of the third quarter.
Operator
Thank you for your participation in today’s conference. This concludes the presentation.
You may now disconnect. Have a good day.