Preferred Bank (PFBC) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Preferred Bank second-quarter 2009 earnings conference call. During today's presentation, all parties will be in the listen-only mode, and following the presentation, the conference will be opened for questions. (Operator Instructions).

This conference is being recorded today, Thursday, July 30 of 2009, and I would now like to turn the call over to Lasse Glassen with the Financial Relations Board. Please go ahead, sir.

Thank you. Good day, everyone, and thanks for joining us to discuss Preferred Bank's results for the second quarter ended June 30, 2009.

With us today from management are Mr. Li Yu, President and Chief Executive Officer, and Ed Czajka, Chief Financial Officer. Management will provide a brief summary of the quarter and then we will open the call up to your questions.

During the course of this conference call, statements made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon specific assumptions that may or may not prove correct. Forward-looking statements are also subject to known and unknown risks, uncertainties and other factors relating to Preferred Bank's operations and business environment, all of which are difficult to predict and many of which are beyond the control of Preferred Bank.

For a detailed description of these risks and uncertainties, please refer to the documents the Company files with the Federal Deposit Insurance Corporation, or FDIC. If any of these uncertainties materializes or any of these assumptions prove incorrect, Preferred Bank's results could differ materially from its expectations as set forth in these statements. Preferred Bank assumes no obligation to update such forward-looking statements.

At this time, I would now like to turn the call over to Mr. Li Yu.

Thank you very much, Lasse. Good afternoon. Our bank reported a loss in the second quarter of 2009. That loss was principally due to an oversized provision for loan losses; continuing writing down of the OREO assets; continuing writedown, although on a much smaller scale, the securities; and also the special assessment by FDIC in the amount of $600,000.

I do like to report it is my personal opinion of finally see a small ray of sunshine on the housing side of our business. About a month ago, I was talking to a group of visiting investors. I told them that I think many of the areas in LA have seen housing prices firmed up and activity picked up. When I was drafting this press release two weeks ago, I put on my belief on paper, and yesterday and the day before yesterday, many reports, including the Case-Shiller, and most importantly, the California Realtors Association report, that reports the June activities, all confirmed my feelings.

This is not to say going forward we will not be receiving additional disappointing appraisal valuations. Other bankers, other brokerage community, other realtors and all the builders all know that today that our appraisal professionals seem to be overreacting. But being that our total construction loan on the for-sale housing side and related land is continually decreasing, we hope going forward the further revaluation will not be as severe.

We now put much of our attention on the commercial real estate side, where we have a $300 million portfolio. The higher exposure items are $80 million in retail properties, $50 million in office properties, roughly $53 million in industrial properties and roughly $30 million in hospitality properties. And as these items are very much employment-related, we are constantly paying much attention to it.

But there are two little mitigation things that I can offer. One is that we -- our origination of these loans average below -- just below 60% LTV at origination time; and that our average property or loan size is relatively small.

Deutsche Bank just released a study of the commercial real estate, and it is not pretty. But all of their conclusion is that the smaller real estate will do much better than the larger size real estate.

Having reported all that, we do have something more pleasant to say, that our capital ratio is now up to 9.6%. We have been actively managing our balance sheet in the past, even with the losses -- all the losses being taken, our capital ratio actually increased. [Even] our Board still authorized a rights offering for $10 million to $11 million, with a very attractive price. We believe that the offering will be reasonably successful. I do hope at the end of third quarter we will be reporting capital ratio in excess of 10%.

Thank you for your attention. I would like to answer all the questions you have.

(Operator Instructions) Joe Morford, RBC Capital Markets.

Good afternoon. A couple questions. I guess first, was, I guess, curious, why $10 million? What is kind of magic about that size of an offering? And also looking at the fact your capital ratios have improved?

Actually, we have done all kinds of stress tests, including the [G19] test, and none of the tests indicated we need any capital at all. But we -- in the early spring, we just feel it is a good idea to raise a little bit of capital. And so with that decision, we've gone through all the works.

For some reason, our offering needs to be approved by the State of California. The document was sitting in their office for the good -- about over one month's period of time. We had to prepare the document for their review, too. But all of this takes a whole range of time, and then we decide to just continue to do it, even with the capital ratio increases.

And the size was decided because since we don't need that much, why dilute our current shareholders that much, as we are offering the prices?

Right, okay. And then the second question was just regarding the credit quality. The total nonperforming asset level remained relatively stable, yet you had a big increase in charge-offs. And I was just kind of curious if you could talk about some of the inflows and outflows this quarter, and was it primarily downward migration of kind of previously identified problems, or are you continuing to see new inflows into the kind of classified assets?

Actually, much of the inflows about the last -- for the second quarter was the result of migration of the delinquent -- delinquents being 30 to 89 days -- delinquent into the current quarter. In this quarter, as of June 30, we do have a large delinquent numbers. And I think I put down on the paper that roughly 33% to -- 30% to 55% migrational factor still pretty good.

Now, one of the situations is that out of the total delinquent number, roughly $76 million delinquent are real estate loans. And the other $76 million, more than 83%, we have very, very, very current appraisal evaluation on, and we have made appropriate reserve on the ones that is needed to have.

The remaining are loans that we think provide enough margin, I guess currently in the ordering appraisal stages. And it will be some delinquent that will be moving into the third quarter, but the entire bank is [hoping], and we make it our goal to reduce the total level of NPAs in the third quarter and reduce the total level of delinquents in the third quarter as compared to the second quarter.

Okay, great. Thanks so much, Li.

Joe Gladue, B. Riley & Company.

Just wanted to ask some questions about the CDOs that you had some charges on this quarter. Just wondering how much have they been written down to from their original value, and what sort of tranche are those CDOs?

Par value on the four CDOs right now is about $7.9 million. Current book value is about $6.3 million. And all four of these were original Single A pieces. So these were kind of the middle tranche of the entire structure.

Okay. Let's see. Just curious on the -- you mentioned that the 30- to 89-day delinquencies, a lot of them were real-estate related. Can you just give us a little more color on what types of properties those are, just the larger ones?

We do have -- I'd like to just say -- just say the [capital] situation. Out of this group of loans, this group of real estate loans, roughly about $43 million are land loans. And then roughly $24 million are construction loans, and the remaining is CREs. These are three categories that make up the three -- total $76 million. The remaining $10 million plus is C&I loans.

All right. That's all I had for now. Thanks.

Julianna Balicka, KBW.

Good afternoon. Can you give us a little bit more color on the moving parts in the [allowance], specifically a little bit more color on any changes to the FAS 5 methodology and such?

Okay. I can tell you, but I would rather have Ed say that. Because he's the one that actually did the calculation. Ed?

Hi, Juliana. Long time no speak. Actually, there were a couple of changes. We've made sort of a structural change on the FAS 5 reserve, the historical lookback. We've always used a seven-year lookback period, but we've changed the weighting in terms of how we look back at those seven years. So the first couple of years are much more heavily weighted and the last, say, three years are much more lightly weighted. So that added to our reserves.

The other thing we did is we increased our allowance, our FAS 5 reserve, on classified loans that are not technically impaired loans, which is something we had not done in the past. And both of those changes probably resulted in an increase of about $800,000 to $900,000 on the past loans.

Okay. And then can you give us a sense of how much is the weighting the last three years versus what it is now versus what it was before?

The first three years, it would be 60%. The last three years, it will be 30%. Before, the last three years are 40% and the first three years about 50%. With first year to be more.

Right. Okay. Very good. And in terms of the rights offering that you briefly touched upon in the beginning, when you first announced it, you had told us a little bit about the commitment from management in your press release. Can you give us a sense of how much has been subscribed or anything like that?

Subscriptions have not come in yet. We just sent it out. And being that our forms require people to write the check to indicating their subscription along with the subscription report, I suspect the most of the subscriptions will be coming in the last two weeks of our offering period.

So we haven't got anything yet. And frankly speaking, if you are [holding] the security and street names, you will not have received the paperwork yet. So we do that, but having -- the next thing is the management commitment. Management, the Board of Directors has -- together has committed $3 million.

Additional board members that will resign, just resigned this summertime, who is still a large shareholder committed $0.5 million. And our Officer Group, and including some of the -- as low as some of our [new] officers, including even one teller, committed -- or they indicated their commitment of about $700,000.

Very good. Thank you very much. I'll step back now.

Don Worthington, Howe Barnes Hoefer & Arnett.

Good afternoon, Li and Ed. Just a couple things. In terms of the REO, were there any dispositions in the quarter?

We have about $10 million disposition in the last quarter. I think maybe over 10. I don't have the exact number.

Okay, good. And then in terms of any regulatory exam coming up? I know you had had one completed a couple (multiple speakers) ago.

We are expecting, based on our own estimation, somewhere in the late third quarter or in the fourth quarter that we will receive visits from our regulators.

Okay. And then I guess lastly, any color on what you expect the margin to do? You had some good expansion this quarter. Kind of where you see that going.

Why don't we take it a joint project, Ed? Why don't you say what you believe and I say what I believe?

You're setting me up now. Well, yes, we did have some good expansion in the quarter, 288 to 333 on a linked-quarter basis. Certainly almost all of that was due to really two things. Lowering the cost of funds as CDs are maturing that were originated last year; they are rolling over, obviously, at much lower rates. And then of course, the inflow of new nonaccrual loans and the accrued interest that is attached to those that we have to reverse out. Both of those were down from the first quarter, which is positive.

I would say going forward in Q3, excluding any new nonaccrual inflows, I would say we'd probably have margin expansion to the extent of about 10 basis points, possibly a little bit more. Now, I want to see what the boss says.

Actually, the 10 basis points I would agree with. But there's one more factor in improving the rather sharp increase in the second quarter's margin. It is because our level of cash-secured loans has been greatly reduced. And these cash-secured loans is earning us, generally speaking, average 1%. So mathematical -- these are mathematically that improve our net interest margin.

Okay, great. Thank you very much.

Aaron Deer, Sandler O'Neill Asset Management.

Most of my questions have been answered, but just a couple. The deferred tax asset, can you talk about that in terms of what your accountants are saying, in terms of the sustainability of that? There have been a number of banks that have had to write those down. I'm just wondering what your thoughts are on that.

I saw a rather large one today -- earlier today. But one of the first things we did going into sort of the quarter-end process was to sit down with KPMG and talk specifically about the deferred tax asset and where we stand relative to a potential valuation allowance that would need to be assigned to that. We went through the numbers. Obviously, I believe for state, it is look forward; for federal, it is look back. I could have those wrong.

But we looked through the numbers, where we were two years ago in terms of earnings, where we could be two years from now in terms of earnings, and where we are at currently in terms of the losses we've had the last few quarters. And we all came to the conclusion that no valuation allowance was required for Q2. Depending on what happens in Q3, if it is something similar to Q2 -- I'm obviously not going to speculate on what the number is going to be in Q3 -- but it is my personal belief that we won't have a valuation allowance issue in 2009.

Okay, that's helpful. Thank you. And then what percentage of the nonperformers are participations?

28.7% -- real estate, solely real estate. Participations we (multiple speakers).

We purchase a participation with 28% -- of the real estate, 28% participations.

Okay, great. Thanks, guys.

Chris Stulpin, D.A. Davidson & Company.

Thanks for taking my phone call. I think Joe asked one of my questions and it was answered. I guess the last question I have is regarding deposit growth expectations going forward, after linked-quarter, they decreased.

Chris, decrease quarterly basis is really because we have loan decreases. And we have decided that we are managing this bank basically speaking in this credit cycle most basically on preserving the capital. So that is number one important thing. And consequently, our deposit is decreased.

But if you look at the decrease in deposits, all of the deposit decreases are coming from the TCDs, which means that our non -- our interest-bearing DDAs stay the same, so therefore the percentage will increase a lot. We like to believe when we decide to add on a loan that we can go out and get the TCDs quite easily, because some of them are (inaudible). We have to say that we believe we are the lowest payor among our peer group.

Okay. Makes sense. Thanks. That's all I have. Appreciate it.

Joe Gladue, B. Riley.

I was just going to ask the other side of Chris's question there, on loan demand and your expectations for loan growth for the remainder of the year.

Well, okay. We actually do not expect loan growth for the remainder of the years. That is basically on the [plain] (inaudible) basis, because when I said expect, I don't see the economy as pick up to the level that we want to increase from the current level of the loans.

This is also partially because we see a good portion of our construction loans for housing will be paid off during the next six to 12 months' period of time. It depends on how the market absorption gets.

And we also see that a portion of our nonperforming loans and our OREO will be liquidated in the next six months' period of time. So we have a rather large asset reduction. We will replace them with some of the loans. And loans are available, not abundantly, but they are available in very -- varied qualities. We are still doing it, but we are doing it very carefully right now.

All right. Thank you. That's it.

(Operator Instructions) John Deysher, Pinnacle Value Fund.

Good afternoon. A couple of quick questions. One, is there any update on the TARP status?

As a matter of fact, we don't have any updates at this point in time.

I mean it has been with them for several months now, I believe.

Yes, yes.

So no response at all?

No, I don't think that -- anyway, I don't want to speculate anything.

Okay. These --

Let me say, John, as I indicated to you previously, we think we have more than enough capital.

Yes, okay. That's fair. The FDIC special charge, $617,000, was that a charge that was assessed to all banks, or what is the nature of that specific charge? I guess was it unique to Preferred Bank, or was this a charge that was --?

No, it is to all banks.

Yes, that is for all banks. The FDIC imposed a special one-time assessment to be paid out on September 30. We had to accrue for it at June 30 because we knew we could reasonably estimate the dollar amount. And the formula is basically total assets minus Tier 1 capital, and five basis points on that sum.

Okay, and that applied to all FDIC-insured banks?

Yes, sir.

Okay. The property for sale, there was one parcel, I think, that had a contract to sell $12 million or so -- $12.2 million, Westchester, California. When is that anticipated closing?

Some time in August, mid-August.

Mid-August. And that is a cash deal?

No, that is a partial cash, partially for the (inaudible) deal.

What percentage of it will be cash?

About 20%, 25%, you know.

20% cash, and the rest will be refinanced by Preferred Bank?

Yes.

Okay. Got it. And in the commercial real estate portfolio, I think it is about $300 million. And you indicated there were four types of categories, retail, office, industrial, hospitality. Those add up to about $210 million, and I'm just curious what is the other $90 million? What type of commercial real estate is that?

The other $90 million including we have some medical office buildings, which is -- we consider some of the most stable properties right now. And we have mortgages on several very, very successful profit-making hospitals. And we have special assets financing, such as 24-hour fitness center, mobile home park, etc., etc.

Okay. And I think the release said the loan-to-value ratio based on origination values is about 58%. What would the loan-to-value ratio be using current values or appraised values?

First of all, not everything is currently reevaluated right now, and we cannot speculate what the current value is. I think each property is different. There is no across-the-board saying how much value we got (inaudible).

But for recent appraisals, what would kind of --

Some appraisals are coming down. Some appraisals -- I was told some appraisals come down probably 30% year-by-year reduction. Some appraisal only shows 5% to 10%. So it is kind of all over the place.

Okay. What percentage of that portfolio has been appraised within the last six months, let's say?

Can't answer that. We can only go back and research that and get back to you.

Okay. All right. That might be helpful to know. I guess the final question is on the rights offering. Ed, correct me if I'm on base here, but those shares will not be registered, but they are not required to be registered. They are going to be freely tradable. Is that right?

Yes.

Okay. So there is no problem with trading the shares post offering?

Yes, absolutely.

Okay. Very good. Thank you.

Julianna Balicka, KBW.

i just had a couple follow-up questions. A little bit to going back to Joe's point about the loan growth, and you started to discuss the decreases. Do you have a sense OF how much you are going -- or can you quantify how much of the construction portfolio you are expecting to run off? And can you quantify what level of nonperformers you are looking to dispose of next quarter?

I don't think I can necessarily quantify that in one quarter, okay?

I'll take two quarters.

You take two quarters, but I think within the two quarters, construction loan payoff will be about in the $50 million to $70 million range. And I think in the nonperforming assets, well, Julianna, just really needs everybody's help, including the economy. We are hopeful we can get rid of about $80 million to $100 million of the assets.

Very good. And then a follow-up question. On the reserve that you have right now, the $30 million, $30.6 million, refresh our memory, how much of that is specific versus FAS 5.

You have the number, right?

Julianna, about $12 million is FAS 5, and that would make the other roughly $18 million as FAS 114 specific reserves.

And do you anticipate your having to switch to more -- faster charge-offs of specific reserves, kind of what we've seen some other banks this quarter?

Can you repeat the question?

Yes, sorry. Do you anticipate that you might need to start switching to charging off specific reserves instead of carrying them, the way some other banks have been forced to kind of --?

No, we charge off -- if you know that we charged off $18 million this quarter. We charged off a lot in this quarter.

Right. Never mind. I don't think I'm phrasing my question correctly. Let me follow up off-line. (Multiple speakers) I do apologize.

Related to the specific reserves, as they go along -- as they prove they are more than a reserve and they will be -- in other words, the value is totally collateral-dependent and it looks like a permanent type of situation, we charge them off.

Right, right. No, I'm sorry. It is my fault. I will follow up.

Thank you. And there are no further questions in the queue at this time. I would like to turn the conference back to management for any closing remarks.

I'm going to be a little bit different, because I've been anticipating one question and I haven't got it all this time. Can I ask myself and answer myself, okay?

The question is that (inaudible) you guys have $107 million land loans. How much of that is nonperforming and bad? Well, the answer is that $27 million out of the $107 million is currently nonperforming. And another $43 million is currently delinquent, with every one that is fully valued and based on the most recent appraisal. And then we look at the remaining about $30 million loan, and we still feel very good about it. So this is the nature of our land loan portfolio on the (inaudible).

Now on the construction loan, housing construction portfolio about $141 million we have on hand, $37 million currently nonperforming and obviously fully reserved when we need it. And another $24 million is currently in delinquent status, and several of them with significant reserves being taken on that. And the remaining $80 million or so, we still feel pretty good about.

So this is status about when we look into our current loan portfolio relating to housing inventories, housing loan portfolios.

Thank you very much, and we appreciate your attention and hope to have better things to report next quarter.

Thank you. Ladies and gentlemen, this concludes the Preferred Bank second-quarter 2009 results conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 800-406-7325, and enter access code 412-1538, followed by the pound sign. We thank you for your participation. You may now disconnect.