Preferred Bank (PFBC) 2009 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Preferred Bank 2009 third quarter results conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (OPERATOR INSTRUCTIONS.) This conference is being recorded today, Thursday, October 29, 2009.

At this time, I would like to turn the conference over to Mr. Lasse Glassen, 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 third quarter ended September 30, 2009.

With us today from management are Mr. Li Yu, Chairman, President and Chief Executive Officer, and Ed Czajka, Chief Financial Officer. Management will provide a brief summary of the quarter, and then we'll open the call 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 materialize 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. Mr. Yu?

Thank you, Lasse. Good afternoon, ladies and gentlemen. Thank you for, to our earnings conference. During the third quarter we decided to further increase our loan loss reserves. We changed the method of calculating the past reserves, historical reserve on the past portfolio. And that is under the FAS 5 definition.

We also stepped up our effort in, evaluation effort in all of our loan portfolio. And for uses we included appraisal reports results for loans that closed about two days ago. So as a result, our total loan loss reserve increased about 60 basis points to about 3.24%. This is even after we charged off a high amount of almost $14 million for the quarter.

The bright spot of the quarter is really a reduction of the 30 to 89 days, commonly known as delinquent loans. This was a trend my staff and myself have been waiting there for a long time. The number now stands at $28 million at quarter end, and we do expect a majority of them will be brought current in the fourth quarter.

There are also some other positive signs. One of them is the increased activity in the liquidation of troubled assets. During the quarter we sold almost $29 million of troubled assets. And we have, at the quarter end, we have roughly $15 million in escrow.

Another situation is that you may not know, for total nonperforming loans, our total nonperforming loans, roughly over $70 million are loans currently tied up either in bankruptcy court or in litigation. That makes our dissolution effort longer and laborious. And I'm glad to point out roughly $50 million out of $70 million-plus will be coming out of the courts in the next 60 days period of time, which will allow us to market them then.

Our lawyer told me with one particular loan--they have made a resolution, made a deal, on one of the particular loans--told me that in seven days he hopes to complete a transaction which will result Preferred Bank in recovering a significant amount of money paid. And it's estimated currently at maybe over $5 million. So I hope that we can report this matter to you in seven to eight days period of time.

For a long time we've had a negative credit trend. And I think we finally see the trend begin to change. We hope this will continue, especially when we see areas--housing price have a five-months-in-a-row increase in pricing. And also just learned that most likely and more than likely, that the Congress will extend the homebuyers credit.

In any event, during the quarter we have increased our deposits. We have decreased our loans outstanding. We have paid off some borrowed from Federal Home Loan Bank. And such increased our liquidity quite a bit.

At the quarter end, our tangible common equity ratio now stands at 9.66%, with a much higher level of loan loss reserves and much lower exposure to the all risky construction and land loan portfolios.

Thank you, and I'm ready for your questions.

Thank you, sir. Ladies and gentlemen, we'll now begin the question-and answer-session. (OPERATOR INSTRUCTIONS.) And our first question will come from the line of Joe Gladue with B. Riley. Please go ahead.

Yes, hi.

Hi, Joe.

Let me first start out on the income statement, I guess in the press release in regards to increase in other expenses, that it mentioned a couple of things. Well, I guess that might have been--mentioned the decline in, mentioned FDIC insurance expenses and as part of the reason that was up. And I was thinking that should be going down after the special assessment. Just looking for more color on what was driving the, I guess, close to $1.3 million increase in other non-interest expenses?

Ed?

Yes. Joe, we had essentially a one-time catch-up with FDIC premiums. Some time ago they did change the methodology. These were previously prepaid assessments, and they moved that over to a different method whereby you would be accruing FDIC premiums and then paying them out. And so this is a one-time catch-up on that to the tune of a little over $1 million dollars this quarter. Obviously, that will be a one-time expense.

Okay. All right. And I guess, in regards to assets quality, you mentioned a step-up in appraisals and just reviewing loans. Just wondered if you could give us an idea of how many, what portion of the loan portfolio got new appraisals during the quarter or got reviewed or whatever?

Well, for all construction and land loans, our policy has been to get appraisal for every six months period of time. And then for the ones that is even showing in between that we take a close look at it. If we feel there is a big valuation change, we will early order the appraisal on the matter. So we're fairly current on all of the loan appraisals as of September 30.

Okay. Also, I was just wondering if you could give us a clearer picture of the--you did have a good decrease in the size of the loan portfolio. Just trying to figure out the ins and outs between loan sales and net charge-offs and originations and everything. Could you walk me though that?

Can you walk him through that as far as the loan portfolio decreases, other from that?

Yeah, I think primarily, Joe, it's really a result of a couple of things. Essentially, you already touched on a couple of them--loans transferred into OREO that were problem loans as well as loans charged off. We did have a very small number of loans paid off during the quarter as well as some renewals. But in terms of new loan originations, I don't believe there was anything of any materiality.

Okay. And I guess I'll just ask, when was the most recent regulatory exam? Is there one coming up, or when was the last one, or--?

They are right here in another room. Have a big number of people that was looking at everything we have. And so far--you know, our bank doesn't have that many loans. I think by the time they are over, they will have looked over over 50% of the loan portfolio.

Okay. All right. I guess that's it for me. Thank you. I'll step back.

Okay.

Thank you. Our next question comes from the line of Aaron Deer with Sandler O'Neill. Please go ahead.

Hi, guys.

Hi.

Hi, Aaron.

A few questions. One is, obviously the level of non-performers, at least optically, seems pretty high. And I'm wondering what other kinds of workout solutions you guys are looking at to help get that moving down in the other direction in terms of loan sales or AP restructures and that sort of thing. And how quickly might we see that come down, given some of the efforts that you are making?

Actually, we don't have much AP restructure at this point of time right now. As I indicated earlier, out of the nonperforming loans are loan area--I mean, a year ago we just go ahead of gradually resettling it.

On the non-performing loan area, as I indicated earlier, about $70 million is currently tied up in court. They're bankruptcy, mostly bankruptcy court, and of which a good portion will come out of court in the next 60 days period of time. And some of them, we can sell them fairly fast. Some of them, you have to market it through a more partnering--how can I say--more slowdown process. Because there are some things you cannot early market them, because the lawyer is tracking them, too. Actually have title to that. You cannot do that because of agreement or chilling of the bids, whatever legal language they're throwing at us.

So what we try to resolve it is that, most of them we try to resolve it by selling it. And that do have few loans that in the portfolio which is currently tied up in court, we actually we think will be corrected by the customer in total by incurring (inaudible) debt. But really, until they're done, they're not done.

Okay. And then those loans--or, I'm sorry, the properties--that are in OREO, are those getting marked every quarter?

We market them continuously. In fact, the marketing effort is spread out to all the area.

I'm sorry, Li, I didn't make myself clear. Are the valuations on those OREO properties being marked to market each quarter?

Yes.

Okay. And with the property that you mentioned that's in escrow now, is there any sort of potential loss or gain on that property?

It's already marked to whatever the escrow value is.

Okay. And then just one last question on the deferred tax asset. You guys made note of the disallowed portion for regulatory purposes. What's the overall deferred tax asset at September 30?

Just over $29 million, Aaron.

Okay, great. Thank you, everyone.

Okay. I do like to point out is that we expect by December 31, the year's close, we'll be able to file a tax return. Our deferred asset situation disallowed portion will be reduced.

Thank you, sir. Our next question comes from the line of Joe Morford with RBC Capital Markets. Please go ahead.

Thanks. Good afternoon, Li and Ed.

Hi.

I guess I was just curious what drove the decision to revise the allowance allocated to past loans, and what exactly changed there?

Well, we've been seeing that the losses in the recent situation--in other words, every quarter goes by seems the load situation, the valuation situation, becomes a little bit more difficult. So we decided to be a bit more conservative, and we tried to get inputs from all different sources, and we decided to change the method. The net result is that the total increase in the past portfolio is 37 basis points which, based on a very complex calculation, totaled down our amount increase between $3.5 million to $4 million.

Okay.

And, Joe, just so you know, to add on to what Mr. Yu said, when we had a longer look-back period in the historical on the FAS 5 reserve, we had that weighted toward the most recent years. So it wasn't a purely ratable historical look-back. We had it more weighted toward more recent years. So it's not as if we went from a pure seven-year look-back to a shorter look-back.

And did that number of years shorten up this quarter? Is that part of how this happened?

Yeah. That's exactly what happened.

Okay. So you went from seven years to when?

To four years.

Four years.

Four years. Okay. All right. That makes sense. Thanks. And then I guess I was a little unclear--you talked about just finishing up a bunch of new valuation work. What exactly was the outcome of that, or on average, what were you finding in terms of decline in values and things with them?

We do have some rather unpleasant decline in value in the land portfolio, which results in the revaluation downward of the land portfolio by $5 million plus, and the loan portfolio by another--between $4 million to $5 million.

We're receiving, having appraisal report compared to the six-months-ago appraisal report. Most of them show the value reduction, appraisal value reduction of between 45% to 53%, which is pretty shocking to us as to why the last few months the real estate market has stabilized yet, the land value goes down that much.

Then we have a very bright new officer who has alerted me on one situation. He says that the appraisal report we're receiving right now are using the comps, basically June comps, July comps, May comps. These are the completed transactions in May, June and July. But they may represent the transactions that was entered into in January, February, or even December of last year, with the real estate at its low point. So we probably, the comp value right now we're receiving is probably represents a transaction that was agreed upon at the lowest part of the time. But which is not to say we say the future is better. We have no control over that. But these values are very disappointing.

Industry, I have asked several of our smarter and more experienced bankers, and they've been telling me they feel the same way. But they think that there's also a degree of great prudence--can I put it nicely--great prudency by the appraisal industry.

Okay. So just to be clear, it sounds like the worst of the valuation hits have been in the land portfolio, not surprisingly. And there, these updated appraisals are coming in 40% to 53% below where they were six months ago?

That's right.

Okay. And then lastly on this, you talked about getting updated appraisals in the land and construction portfolio every six months. How often are you doing that for your term commercial real estate exposure, and what percentage of the portfolio would you say has had an updated appraisal there within the last three to six months?

We do real estate appraisal situation in this way. Actually, in the commercial real estate situation, almost every loan is looked upon, only the larger loan, larger than $3 million loans, we look at--larger than $2 million loans-- our credit administration was telling me larger than $2 million loans was looked upon on the continuous basis. And we value it based on the cash flow they're receiving, the rent roll, the property condition.

And seeing most of loans have secondary and third resources of payment that we also continuously keeping on top of the borrower, the creditworthiness on the whole situation. So it is not a matter of getting appraisal.

And we're self-appraising them by using a different CAP rate, stress tested with a different CAP rate. And with an increased vacancy ratio and et cetera, et cetera. We're doing that on a continuous basis.

And one other situation is that I'd like to point out to you that at the end of our press release, there is a table showing that our commercial real estate, CRE detail as its origination date, as its origination LTV and origination DCR. And the three years has gone by. Many of the loans have been paid down somewhat. Many of the rents have increased. I mean, maybe today there is some loans have decreased in--increase in vacancy ratio, decrease in rental. But still the movement part of change is not all negative from the origination date and so on. So we've been staying on top of them.

And every six months we send our people out to do property inspections. We see the property and compare the rent roll we're receiving as they are actually the tenants are there, and so on. And we see the property, take picture as its condition, so on and so. It has been continuously monitored.

Okay. That's very helpful, Li. Thanks so much.

Okay.

Thank you. Our next question comes from the line of Don Worthington with Howe, Barnes, Hoefer, Arnett. Please go ahead.

Good afternoon.

Hi.

A couple things. One, in terms of the REO sales, can you provide a little more color on which properties those were, types of property?

For the third quarter REO sales, we sold a group of condo and plus one undeveloped land. And, actually, we sold about five condo projects, of which two of them are broken condos.

Okay. And then it looks like in order to sell them, it was a combined loss of about $4.5 million, additionally?

Right. Actually, most of the loss is on one loan; $2.1 million loss is on one loan. Because after we foreclosed the property, we owned the property. Then we went to the city, find out there's many situations, many of the construction that was done is not up to code. And the cost to complete has greatly increased. So we had a previously agreed-upon selling price. There was a reduced selling price to accommodate all the situation, to make the sale. So most of the losses relates to one loan that where the construction defects has been noted afterwards.

Okay. And then in terms of the net interest margin, how much did interest reversals impact the margin this quarter?

Don, interest reversals were about 20 basis points for the quarter. And the effect of all of the non-accruals was about 100 basis points.

Okay. And lastly, in terms of the CDO, how much of that has been written down to date? I guess there were two of them, yes?

Yeah. We wrote down two. The extent--now, if you want to know our book value versus market value or--?

Yes. Or I guess what I'm getting towards is how much additional exposure there might be to additional OTTI.

Well, we still have about $5.7 million in book value. Current market value on those is about 39% of that.

Okay.

We would anticipate--we've made no secret of this. I think, Don, you and I have even talked about this. We will have further slow bleeding on this CDO portfolio. But unlike in the past, it's not going to come in large chunks like it has.

Okay. All right. Thank you.

Thank you. Our next question is from the line of Julianna Balicka with KBW. Please go ahead.

Good afternoon. Thank you for taking my questions. How are you?

Hi.

Hi. I have a few quick questions. Going back to Don's question on the margin, what is your outlook going forward for next quarter and next year?

Well, we just have our first draft of our budget. We have not--I don't know whether he'll be brave enough-- are you brave enough to say anything about that?

Let's say, it will be north of 3.09, Julianna.

North of 3.09?

Yeah. Probably in the, between, I would guess between 3.25 and 3.50 for next year. Obviously, the big wild card there is the effect of the non-accruals. But in the plan we show a specific level of non-accruals on a month-by-month basis based on what we know now, based on what we believe dispositions to be, non-accruals moving into OREO, those funds being redeployed, et cetera, et cetera. And that's kind of where we're targeting right now.

Very good. And then the gains that you took this quarter, what is the outlook for taking gains next quarter and subsequent quarters, or I mean, what's left?

Actually, not a lot. The--.

Actually, not much. Not much. I mean, if I were you, I wouldn't count on anything.

Okay. Very good. And then in terms of the $50 million of the loans that are in bankruptcy proceedings, right?

Actually we're $70 million in bankruptcy, litigation proceeding. I think $50 million will be resolved. $50 million will be resolved in the next 60 days.

Okay. Now have those been, what kind of further marks do you anticipate on those loans, or where are they marked to, or what's going on in terms of that?

We cannot market them right now. Because once in the bankruptcy court, a lawyer told us you are not supposed to market these things.

You can't market them, right. But have you written them down?

Yes. We have written that down, okay. We have written down to whatever the current value is.

Right. Okay. And then a final question is in terms of some of your asset quality results this quarter, to what degree did the participations that you have influence some of your provisions and/or charge-offs? So how did that work out?

Well, we didn't really calculate that. I think that in the charge-off in the loan loss provision side and total credit cost side, the participation loan still represents over, and I venture to say more than 50% of the whole picture now, total credit cost. So it's still they are oversized.

Okay. Excellent. Thank you very much for taking my questions.

Thank you, ladies and gentlemen. (OPERATOR INSTRUCTIONS.) And our next question's from the line of John Deysher with Pinnacle. Please go ahead.

Hi.

Hi.

A question on the commercial real estate portfolio. I think the number at the end of September was $340 million or so.

Yes.

Up from $300 at the end of June.

Yes.

Why did that increase? Was that a migration of loans that came out of construction and into--?

Most of them is completed construction projects. If you see there is a, almost a corresponding relationship between the reduction in the commercial construction loans. Not quite the same dollar, the same amount, but corresponding reduction of that, which means the project has completed construction, so is stabilized and become a (inaudible) term loan.

Okay. And what types of projects are those?

Mostly there's two --they are retail and medical office project. One large medical office project and a few retail projects.

Okay. And what are the lease-up rates or vacancy rates on those properties right now, those new ones?

It's hard to [conglomeratize] the whole situation. I would say it is being done based on the original loan agreement that they have to have a--how should I say--they have to be a reasonable amount of pre-leased, already leased, before we will let them become a mini-perm on the CIE.

Okay. But they're new properties coming into a market that's probably got oversupply at this point? Is that fair?

I wouldn't know how to answer the question. Can you try me again?

Well, they're new properties. When you say retail, that's a strip center or something?

No. The new properties, these are the construction projects we're doing.

No. You just said that they were completed construction and they've moved into completed project status.

That's right.

And they're in the process of being leased up.

Yes.

Is that correct?

That's right. Some of them are already leased up.

Okay. So they're fully leased?

Some of them are fully leased, yes.

The two that you mentioned--.

For instance, you have a 24-Hour Fitness. It's already pre-leased. So after it's done, it's very quickly. There's another one is a Walgreens. By the time it's completed, they just move in.

Okay. So there's no risk of those properties written down because the landlord falls short of leasing them?

No. We don't see that. If there is a risk of doing that, we wouldn't let it become a commercial real estate right now.

Okay. That's the question. And the commercial and industrial loan portfolio--what's going on with that in terms of the creditworthiness of those customers?

You mean the C&I loans?

Yes.

Well, we just have to go through our normal procedure, the monitoring of the C&I loans, which keep a close eye on them. Our C&I loan situation is being also monitored based on a monthly basis, monthly looking over them and then getting periodical, quarterly financial information update, and so on. So if you, something weaknesses is being spotted, immediately a call would have to be made to the senior management.

Did they submit--did those customers submit budgets for 2010 to you as a condition of maintaining those loans?

You mean C&I?

Yes.

C&I budget is not necessarily a requirement. It's historical information that's a requirement.

Okay. So you're looking backwards and not forwards there in terms of containing this.

I don't know in this whole (inaudible) situation that--obviously, for some customers, we'll get their budgetary information. I don't know how much that we all should be trusting the budget of a C&I loan.

That's exactly my point. Okay. All right. So that's $240 million. And then finally, on the balance sheet there was some--underneath the last asset item, $40 million, other assets up from $14 million, I think. Why did that jump so much, and what's in that?

That is the number.

Other assets under the deferred tax assets? Why is that up so much, and what's in there?

John, I'll have to get back to you on that. I don't have the detail in front of me right now.

Okay. I'll follow up with you. Thanks.

Thank you. And at this time there are no additional questions. I'd like to turn it over to management for any closing remarks.

Well, thank you that very much for your interest. As we said that we hope we have seen the beginning of the turning around from a negative credit trend. We hope that it will continue, that our entire staff and I was hoping that the fourth quarter that we have a much, much better results. So with that, I'd like to close out the session. Thank you very much.

Thank you, sir. Ladies and gentlemen, if you'd like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030, using the access code of 4174801 followed by the pound key. This does conclude the Preferred Bank 2009 third quarter results conference call. Thank you for your participation. You may now disconnect.