Preferred Bank (PFBC) 2010 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Preferred Bank first quarter 2010 conference call. (Operator Instructions.) This conference is being recorded today, Monday, May 3rd, 2010.

At this time, I would like to turn the conference over to Lasse Glassen with Financial Relations Board. Please go ahead, sir.

Thank you. Good day, everyone, and thanks for joining us to discuss Preferred Bank's preliminary results for the first quarter ended March 31st, 2010.

With us today from management are Mr. Li Yu, Chairman, President and Chief Executive Officer; Ed Czajka, Chief Financial Officer; and Louie Couto, Acting Chief Credit Officer. Management will provide a brief summary of the quarter and then we'll 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 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'd now like to turn the call over to Mr. Li Yu. Mr. Yu?

Thank you, Lasse. Good afternoon.

I'm pleased to report that 2010 first quarter net earnings were $3.1 million, or $0.20 per share. Actually, the results exceeded a little bit our own expectations. And this was really good news to us after a very stormy 2009.

And looking in the future a little bit, and really depending on the pace of the recovery of the Los Angeles economy, and let me emphasize Los Angeles economy, and also our speed of resolution of our special assets, or the nonaccrual loans and OREO, and our remainder of the year may be or may not be as good as the first quarter.

This quarter we reduced our non-performing assets 14%. We thought we'd do better than that, we were doing better than that, until the last minute, March 31st. A couple deals, as usual, they always drop out of escrow. But having said that, there's a whole lot of activities going on and we answer the activity level to you a little bit later. We're very encouraged by the activities of the resolution, pace of resolution.

Now, our bank had a concentration in construction and land loans. That is really the source of all our major losses in the past. Let me give you some piece of information.

For all the credit costs, which includes charge-offs and OREO losses, meaning the write-downs and the sale loss, okay, all of them together, roughly 75% of all the credit costs are from construction and land loans. And out of this 75%, almost 90% of that are from construction and land loans in other areas. And within this group, okay, more than three-quarters are really related to participation loans with other banks. Well, I shouldn't say more than, close to three-quarters are related to purchase of participations from other banks.

As of today, within the participation land loans in outside area, or participation overall, we only have $39 million left, with $14 million performing and constantly measured against current market value, and the remaining $24 million all in non-accrual and always written down to -- or fully provided to match the current valuation reports.

So with that, looking forward, there's not whole lot of the so-called sorts of trouble left and, therefore, the pressures of significant additional loan loss provision is really abating.

Within our commercial real estate loans, we think it's performing as we expected. And we identify as much as we can identify at this point of time and provide a reserve whenever possible. In many cases, reserve was made, a provision was made on loans still performing, but with a temporary value -- with a value erosion. The value could be temporary as the market recover, or the value could worsen. If the case later on, additional provisions will be needed.

So, all in all, we feel more confident at this point in time than ever before. So, we're ready to face the -- to resolving all the credit issue within this year. And it is my best judgment that we continue this decline in our non-performing assets over the year going forward.

And aside from that, I guess everybody knows that we're ordered to raise additional capital by FDIC and CDFI, and we are fully confident that such effort will be consummated within a short period of time.

Thank you. Now, we'll open for question.

Thank you, sir. (Operator Instructions.) And our first question is from the line of Joe Gladue with B. Riley. Please go ahead.

Yes. Hi, Li. How are you?

Hi, Joe.

Just wondering if you could -- I guess the press release gave us some update on some of the parts of the Consent Order, I guess, related to capital levels. But I guess there was another part of that related to bringing down the classified loans, the substandard loans, to below 50% of Tier 1 capital. Just wondering if you could update us on your progress in regards to that.

We have made substantial progress in that particular area. And in the best forecast, we will be close to meeting that requirement by the end of the year. So, I think Louie probably give even a little bit more insight right now. Louie, would you want to give more highlights on that?

Sure, I'd be glad to. Again, this is kind of a tricky provision item because what it calls for is the reduction of assets classified substandard in the September Report of Exam. So, would not include anything downgraded or a grade change subsequent to that. So, it is a finite pool. And as you know, the Reports of Exam are confidential so, therefore, we can kind of talk in broad senses.

The 100% to capital requirement is in September. It's not until 50% until year end. We obviously internally know which assets they classified substandard. And given that is a finite pool, when you see the reductions we have in loans and in nonaccrual loans and in our construction and land portfolio, you could probably gather from that that we are having reductions in those assets as well. Internally, we have our projections and we are confident that we'll be at or near the 50% level of the capital by year-end as the Consent Order calls for.

Okay. Could you just, I guess, give us what -- it's not entirely related to that same question, but what the classified assets are and how they've changed since year-end?

We really, again, can't get into -- because it is FDIC Report and anything coming from that is subject to FDIC Part 309 and confidential. But if you can kind of understand that there's probably a high degree of correlation between that and NPAs given our reduction in NPAs, you could probably gather form that that our substandard levels are actually coming down as well.

Okay.

Joe, let me just (inaudible) the situation. The word substandard classify is really a very judgmental type of opinion. You have three different group of people coming to review the bank, all of them are so-called FDIC examiner. They may come up with three different answers on the same loans, okay? One or two of them. Many of the loans that they see (inaudible), some of them they may come with different ideas in that.

And so, the long -- sort of the situation is, at September the 30th, a number of loans was rated substandard and subsequently got paid off or subsequently got brought up to date and so on, okay? So, this is one situation that's happening that we cannot go into the detail on that.

Another situation is that people in their quest in so-called the matching certain number in the past often give up unnecessary economic value. Let's assume there's a loan that is classified, but it's performing, okay? We know we're going to be paid off by 2011 or some time.

So, why, in order to make the December 31st cut, to take a $2 million or $3 million or $4 million hit on the capital on loss by selling the note? That is also a economic situation that we have to deal with. And what we hope is that, by that time, there is enough substance of that loan there that we can reclassify them to a performing or to a so-called an unclassified asset, upgrade it. So, it know it's -- I'm very much long-winded getting to things that you're not used to, but we're facing that every day.

Okay. And I guess I'd like to talk about the provisioning or the lack of provisioning in this quarter. Just -- obviously, you did have a good decrease in nonaccruals and eliminated the past due 90 days. But you still had some increase in early-stage delinquencies. Just wondering if you could I guess touch on what's going on with the not--.

I'm going to be doing the so-called overall situation and Louie can add on to some of the details on the whole situation.

Okay.

We have at the quarter end -- and don't forget we've just come through a full opinion audit by KPMG. With the quarter end that we have searched left and right and north/south, try to put everything we can identify so far and bring it to the valuation report that we have received. Although there is no assuring -- assurance that the future valuation report will not be as good as the last received, but with the market stabilized right now, the chances of not, it's not as dangerous as used to be.

But we have done all that, after done all that, I think we still have a little bit unallocated left. We cannot risk the situation of arbitrarily putting additional loan loss provisions because that would be non-GAAP. And also, on the borderline of income managing being criticized for that. But we did try to do as much as we can in looking at the whole loan loss reserve situation.

Part of it is because, whenever you go through the audit process at the year end, you're accountants, or your auditors, have tried to see every valuation report that they can and sort of like taking to as of December 31st. There may be a small portion of the losses already (inaudible), but our guess is very little.

But it probably -- all the situations resolve is that we think we are over-reserved as of September 30th anyway. If we (inaudible). But different opinion in situation. But there are a lot of loans that later on got paid off. When the reserve is released, we upgrade it, the reserve is released. Or the construction loan where they are selling down the price is much better than (inaudible) estimate it and the reserve number is being revised downward.

Okay.

Louie, anything to add on?

Yes. I just, again, when we do our allowance analysis, we obviously follow GAAP procedures where we're under FAS 114, looking at recent appraisals. And we have the discipline here that we get properties reappraised every six months for impaired and classified loans.

One of the things we've noticed is that the items that we're getting reappraised in the first quarter would have been the ones that we had appraised in the third quarter of '09. And on average, we're seeing a very slight decline, if not in some of our properties we're actually seeing values holding steady or going up.

And what was happening in '08 and '09, each quarter when we were ordering, as many other banks were ordering, new appraisals to do their FAS 114, they were determining 20% to 30% declines, which was significantly increasing the reserves and/or charge-offs for impaired and/or classified loans. And so, that is very much a change in the first quarter of 2010. Certainly, there is -- we hope that would continue, but there's no certainty that that will.

The other item, too, is -- again, we follow FAS 5 to do on our pass loans. And again, that is a mathematical calculation based on historical loss percentages. And as the appraisals and the charge-offs begin to moderate, that is also going to have positive effects in that portfolio and in that analysis as well.

Okay. I'll just ask one last question and give it -- give up the floor to someone else. The asset -- nonperforming asset migration table you put in the press release. It's nice, but looking at the line with the sales and payoffs of loans, I guess particularly wondering of sales of nonaccrual loans in OREO, are you seeing much additional charge-off on those sales, or are you -- they generally coming in at where you've got the properties marked down to?

Well, that's an interesting question. I think Mr. Yu kind of brought this up before, where we -- our nonaccrual loans, we have several projects that now are in the sales phase. And one of the kind of decisions we have to make internally is do we wait for the natural sales of the units where we've got it marked to, or do we, for expediency purposes, perhaps take a further slight liquidation discount to move them more quickly off the books. And that's kind of what Mr. Yu was referring to early.

And economically, in many cases that doesn't make sense to move those for expediency purposes since they -- since the units now, the project is in sales stage and they've gotten some units in escrow already. Whereas, again, in the past we could not have said that and we were more inclined to do so. In 2010 we begin to see that our borrowers are getting units in escrow, and even on loans that we have in the past put on nonaccrual, it might make less sense for expediency's sake to move those out in a note sale and take a liquidity discount, if you will.

Okay. Alright. Thank you.

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

Good afternoon.

Hi.

Hi. How are you?

Good.

I wanted to talk a little bit about deposits, if I may.

Okay.

You've had some pretty good growth this quarter, $31 million and 6%. Can you talk about where those loans -- where those deposits came from? Also in the context of, in your 10K, it looks like you had $793 million of CDs that were maturing in the first quarter. So, with the loan -- with the deposit growth this quarter, that kind of implies some pretty good inflows. So, maybe you can elaborate on that, please.

Okay. First of all, let me give you the overall deposit increases. I guess you've seen between year-end and the first quarter, there's about $70 million increases, if I remember correctly. But if you notice that we do have about $30 million increase. A fairly good increase on the DDA. And also, we're showing also additional increases on the MMAs and other interest-bearing deposit numbers. So, it's across the board increases.

And also that we try to build up a little more deposits in the PCDM because, as you know, within our Consent Order that we have to get rid of the broker deposits. So, what we had done is that we built up our CDs a bit also in anticipation of these -- getting our broker deposits run off on the whole situation.

Now, Ed is stepping aside, trying to find the information for the detail you mentioned later. So, we'll just start with the next question and when he come back he'll give you the answer on the earlier one you just asked about, the $700 million.

Julianna--.

--Okay, oh, he's got it now.

No, I was just looking at it. $793 million is the total amount of CDs at the end of the year, not the amount that's maturing over the course of 2010.

Oh, my mistake. Sorry. In that case, how much of your CDs and broker deposits matured in the first quarter that did not renew? And what kind of balances are going to be maturing in the next quarter for which you're going to have to reserve your liquidity?

We had $42 million of brokered mature during the first quarter that went out, and obviously not to be renewed. And I'm sorry, Julianna, what was the second part of the question?

And what's going to go out in the second quarter?

Boy, you would want to know quarter by quarter. I do know -- I don't have the exact number. I do know for the course of 2010 there's a total of about -- I think it's $111 million maturing during the year. So, a substantial piece of that is already out of the way in Q1.

And then the deposits? Where did they come from? Like, what kind of customers? Internet, branches, I mean--?

All sorts of Internet is part of it. Branch is part of it. And also that our C&C - C&I customer also had some deposit to it. We're able also to gain a few new customers that give us substantial deposits, too, now.

Yes. I think what's happening is, Julie, there's a lot of the deposit diversification that customers are doing as well. And so, perhaps because of the mergers and acquisitions of East West and other banks used to be -- they're maybe diversifying out of some of those other banks into ours. And we've noticed that there's been some diversification that our customers are doing, so there is some flow of deposits in the community.

Okay. That's good to know. And then a final question and then I'll step bank, please. And I may switch to loans for a second. In your 10K you discussed the substantial loan portfolio pay down to fund your deposits. And I was wondering -- and it seemed that the decrease in your loan portfolio linked quarters. I was wondering if you have a target loan portfolio size for year-end, maybe target by portfolio category, or how are you thinking about your future balance sheet?

And this is Louie Couto speaking. Again, I think the biggest thing that we're really focused on is reducing our concentration in construction and land loans. That has been the most problematic portfolio for us, especially participations purchased and participations purchased outside of the LA/Orange County area. So, that is our primary focus, is to allow that to continue to run off and decline.

As far -- we're also going to be opportunistic to the extent that there are prudently underwritten good customers that bring deposit balances to us, whether it be either very low loan-to-value COE or C&I. But again, it has to be a relationship type program. But certainly, our focus at this point is in reducing the construction and land portfolio.

Julianna, from the total assets and liabilities management point of view, total loan balances at year-end is not expected to have too much differences than current level. Adjustment slightly downward and maybe outward. The reason is that some of the sales of OREO, we will be facilitating with some financing. That will increase it.

There's also some unfunded, although not much, unfunded construction loans that will be funded throughout the year that will increase the balance a little bit. These are offset by the payoffs on the loans in a situation. And as we go forward, we have to maintain our reasonable earnings situations as balancing our total asset side. So, we also -- we're not stopping making new loans, we just want to do sensible new loans.

Okay. Very good. Thank you very much for the color.

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

Good afternoon.

Hi, Don.

Just one question. In terms of the margin, where there any interest recoveries that helped the margin this quarter?

We don't have any interest recovery this quarter but we do have recoveries from guarantee. I mean, recovery from a guarantee, which is resulted in other income increases. I mean, again, we're over there huddling. We're trying to find out what the interest recovery is. We do have some, right?

We did have some loans that went back to accrual status. But in terms of overall recovery from previous charged-off, we didn't have any, Don. And to add a little more color to your net interest margin question, the margin was compressed about a full point in Q1 due to the effect of nonaccrual loans. It would have been about 403 on a pro forma basis versus the 307 we posted during the quarter.

You mean the reversal, as a result of the reversal.

And all the ongoing on it.

Okay.

Yes.

Okay. And then any ballpark figure in terms of how much capital you think you need to raise?

Well, at this point in time, we will not venture to say that at this point in time. But also, the Board is constantly monitoring, try to decide what is optimum situation, I mean, of capital raising. But one thing we know, that it will be sufficient to handle the requirement that is put out by our regulators.

Okay. Thank you.

Thank you.

Thank you. (Operator Instructions.) And our next question is from the line of Jeff Maher with Taylor Funds. Please go ahead.

Thank you. First of all, I'd like to congratulate you guys for a nice quarter.

Thank you.

Thanks, Jeff.

You're welcome. And then also, kind of going back to the question earlier as far as the capital raise, with the performance that you guys have done, I mean, it's fantastic. Just kind of throwing it out there, I mean, does it make sense to raise capital at all at this point in time?

We have to. You're talking -- happen to be we're not answering that. I'm answering that without any guilty feeling because I myself, as it's on record as being the largest shareholder of the bank. And raising the capital certainly would be dilutive to my own interest. But with the regulator situation putting on the table, there's no way we can escape that.

Okay. And just out of curiosity, are you anticipating as far as a portion of that new capital coming from China?

There is no China. I mean, I don't know where the China--. China, I mean -- one thing I know. Any Chinese banking institution, their capital is not -- so far not approved by Federal Reserve yet, at this point in time. My intelligence is that the money (inaudible) in China in a Federal Reserve bank and try to come up with a -- so a MOU. Before that was signed, they cannot make investment. Now, individual citizens I don't see any of our interested parties is people from China directly. There maybe one or two minor amount.

Okay. Thank you.

You're welcome.

Thank you. (Operator Instructions.)

Okay. If there are no other questions, thank you very much. We know we still have a long hard road ahead of us, but we feel so much better than we ever felt before and we hope that the next quarter we can be equally as positive as present in reporting our earnings results to you. Thank you very much.

Thank you. Ladies and gentlemen. This concludes the Preferred Bank first quarter 2010 conference call. Thank you very much for your participation. You may now disconnect.