Preferred Bank (PFBC) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Preferred Bank second quarter 2010 conference call. During today's presentation, all participants 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, July 29th of 2010.

And I would now like to turn the conference over to Lasse Glassen of 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, 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 to your questions.

During the course of the 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 detailed descriptions 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 very much. Thank you for attending our press conference. Ladies and gentlemen, for the second quarter of 2010, we lost $3.1 million, which makes the whole year, year to date, breakeven.

Aside from that, I have several better news to report. Number one and the foremost, the most important one is our raising of the $77 million of new capital. After expenses, we'll add more than $73 million to our equity.

We have now very confidently exceeded the capital ratio requirement that was set forth onto us by our regulators. And over the long term, I believe that our capital offer will even grow bigger.

The next is the improvement of our credit qualities. During the second quarter, nonperforming loans have been reduced 32% from the first quarter, and also the OREO has improved roughly 5% from the first quarter. Now, if we include the $17 million of sales that was scheduled for June 30 closing, but actually slipping to July, the improvement will be 31%.

Management has always been very focused upon the past due loans, as it is an early indication of our credit situation. I'm also pleased to report that as of June 30, past due loans have been reduced to $9 million from the $23 million amount on March 31. Of the $9 million, $8 million is related to one relationship which we have reason to believe that it will be taken care of and paid off mostly in this quarter.

Now, our next most important goal was obviously working diligently toward the goal of lifting up the consent order that was placed onto us by our regulators. Meanwhile, our bank maintains the capital with good liquidity, reasonable overhead, and a decent net interest margin that will gradually expand along with the improvement of nonperforming assets. We are highly encouraged at this time.

Thank you very much. I'm ready for your questions.

Thank you, sir. (OPERATOR INSTRUCTIONS.) And our first question comes from the line of Joe Morford with RBC Capital Markets. Please go ahead.

Good afternoon, Li.

Hi, Joe.

And congratulations on the improvement in credit this quarter.

Thank you.

I guess along those lines, I wondered if you could speak more broadly to classified trends. Directionally, are they improving as well, or are you seeing just much new inflow of problems, or is this pretty much just working out the known issues?

One of the classified are very highly related to the past deals. They have, seems to be a high correlationship. And one of the indications that past due has been down, so that probably is a good indication that classified's also coming down, which is also, in our opinion, it is. And during the second quarter, during our capital raising process, we have very extensive outside loan review by looking through 70% of our total credits in dollar amounts and penetrating into a substantial amount of our performing loans and good quality loans. And we have implemented all of the recommended corrections, substantially all of the recommendations that they had.

But which not to prevent from a new event that could happen, which we hope is very little, and be of another body coming in to take a different viewpoint on certain loans.

Right. Okay. And then, I was just curious on the OREO sale that was recently completed this month. Was that a bulk sale of multiple properties, or was it just a couple, and in the end, what was the ultimate value realized--excuse me?

Only one property.

Only one property, okay. And what was the--I'm sorry? I'm just curious what the ultimate value realized was versus the initial loan balance.

The initial loan balance, including our portion of the loan, is roughly $20 million. And there's another party of the loan audits that's close to $10 million. The total value of the property is about $30 million. We realized approximately $27 million on it minus a little bit of expenses related to it.

Okay. Perfect. Thanks so much, Li.

Thank you.

Thank you. And our next question comes from the line of Aaron Deer with Sandler, O'Neill and Partners. Please go ahead.

Hi, guys. This is actually Andrew on for Aaron. How are you?

Hi, how are you?

Good, thanks. Congratulations on the capital raise. It was very nice to see.

Thank you.

First question, should we be assuming a zero percent tax rate, given the valuation allowance in the DTA is out there?

Hi, Andrew, this is Ed. Yes, I think for the next--at the very least, for the next probably three or four quarters, I think we want to assume a zero percent tax rate because of the valuation allowance in the DTA. As I think I've talked before, until we can show a distinct pattern of quarterly profits and visibility to future quarterly profits, until such time as that presents itself, the valuation allowance will remain on the DTA.

When that does take place, though, when we do finally get the valuation allowance back, that's going to take place over a number of years.

Great. Thank you. And then next question, the share count. It looks like you guys have a meeting of the shareholder vote this Friday, so I guess possibly these shares could be approved to convert on Saturday morning. Is that correct? When should we be assuming the common shares for calculating our share count? Should it be Saturday?

If you're referring to when the shares will actually convert, assuming we have a positive vote tomorrow, that will actually take place five business days after the vote takes place. So at this point, it's August 6.

So August 6 is the day that we should use, assuming that it's approved?

Correct.

Perfect. Thank you. No more questions.

Thank you. And our next question comes from the line of Joe Gladue with B. Riley. Please go ahead.

Good afternoon, Li, Ed.

Hi, Joe.

Hi, Joe.

I just wanted to touch base on the balance sheet a little bit, still having considerable shrinkage of assets, even with the capital raise. Just wondering, I guess, what your thoughts are going forward, if--obviously, there's not a lot of loan demand--but anyway, what do you think? How much shrinkage do you think is left?

Well, we do not believe between now and the year end there will be substantial, a large amount of shrinkage on the loan side. As you can--obviously, the total asset side is really depending on the substantially over-liquidity that we have in there right now. We have $160 million that was sitting in a cash account over above the security investment we have and the lines we have with the banks, with the home loan bank and so on. So possibly what we need to do is some of the broker (inaudible) will be running off, it will be have some kind of shrinkage on the asset side. But as far as the loan total amount, we like to hope there's no more shrinkage, approximately, say.

Okay, and I just wanted to touch base on the net interest margin. I see that average asset yields were down a bit from the March quarter. Just wondering what was driving that? Was it just changing mix, and should we expect similar to that?

I already answered part of that. Ed, why don't you start first?

Okay, all right. That's fine. Why don't I go ahead? Okay. Well, a couple of things, Joe. Yes, asset yields did come down during the quarter. Primarily, we had a little bit on the loan side, but then we had some on the investment securities side as well. We've been doing some repositioning of the investment portfolio. We're getting out of--to the extent we can, and in a very orderly and thoughtful manner--we're getting out of some of our municipal positions, replacing those with some agency mortgage backs, a couple of corporates, very high-rated corporates, Ginnie Maes, et cetera, some callable agencies. So that has an impact on the yields on the investment portfolio.

In terms of the margin going forward, obviously, you saw the margin shrink about seven basis points. One of the big challenges we've had over the last, probably six months, is we've had to keep a very liquid balance sheet, and that's been noted, obviously, with the high levels of cash that we've had over the past few quarters.

Now that we've raised the capital, our capital ratios are well beyond those required by the consent order, what we're starting to do now is to deploy some of that cash. We had $160 million at the end of the quarter. We subsequently got our tax refund, which was $27 million. So we have almost $190 million in cash on the balance sheet. And now that we don't believe--at this point, we do not believe that liquidity is as big a concern as it was, say, six months ago for us--we're going to start deploying some of that cash. And you will see that in the form of what we hope to be an expanding margin over the next few quarters.

And just, maybe if you could just touch on any benefits to come on the funding side going forward?

We didn't see anything that's on the funding side. The rate is going to be increasing there. The fact that we foresee was in the next two or three months' period of time. The rate is going to be relatively level out at this point in time. So however, economy may change any time, but right now, within the horizon to the third quarter in, we wouldn't see funding costs change much.

And I guess the next question, I guess the other non-interest income line was down, not a huge number, but a good percentage from the prior quarter. Was that any one thing in particular or something--?

I think some of that has to do with our service charges on deposit accounts are down a little bit as customers get a little more sophisticated in managing their cash. The other thing that's in the non-interest income line item is our trade finance income, and that area's been a little bit soft over the last few months as well.

So I don't expect a large expansion in non-interest income over the coming quarters, but I do think this is probably one of the lower quarters we've had relative to non-interest income. And I would look for it to expand a little bit.

Okay, all right. That was it for me.

Thank you. And our next question comes from the line of Joe Stieven with Stieven Capital Advisors. Please go ahead.

Good afternoon. First of all, congratulations on a nice quarter.

Thank you, Joe.

Thanks, Joe.

Two questions. On the OREO sale, it said in July. Is that already completed?

That's done.

Okay, that's already done. That's question number one. Then question number two, on a nonperforming table you have, you have underneath your nonperforming loans at the end of June, you had about $74 million. Then there was a line item that said, "Loans Held for Sale," so I'm assuming that you've got $12.7 million of nonperformers held for sale. And if that's the case, when are those scheduled to close?

Those are loans that we have--again, this is Louie Couto speaking--that we have contracts on that are expected to close during the quarter, and we have marked those at lower cost or market.

So in theory, then, hopefully those will come off without any additional charges?

That's correct.

Okay. Guys, that's excellent. Thank you.

Thank you. And our next question comes from the line of John Deysher with Pinnacle. Please go ahead.

Good afternoon, everyone.

Hi.

Ed, when you said you were going to be deploying the cash that's been built up, what exactly are you talking about?

As I indicated, what we're trying to do--obviously, Mr. Yu talked about the loan book and not wanting necessarily to shrink the loan book for the remainder of the year in order to keep earning assets on the books. Right now, that cash, John, is only earning us about 12 basis points at the Federal Reserve, and so essentially, what we're trying to do is take some of that--certainly, not even half of it at this point, but a significant amount of it--and deploying it into the investment portfolio in the form of agency bonds, Treasuries, agency mortgage-backed securities, a couple of corporates, Ginnie Mae, and some SBA pools.

So we're investing in a wide mix of very high-quality investment securities in order to move that $160 million that's earning 12 basis points and get a significant portion of that up earning somewhere around the 3.5% to 4% range.

3.5% to 4%. What would your duration be to earn that?

It depends on the instruments, generally speaking. But we have a very, very short balance sheet in terms of repricing. We're trying to keep duration as short as we can, and balancing that with the yield and the quality of the credits. At this point, I don't have the number in terms of what the overall duration is, John.

Okay. That would be helpful to know. And in terms of the muni positions that you're coming out of, are any of those at risk for downgrades, given the municipality situation that a lot of the communities are experiencing right now?

I'm not sure at this point. We have had some downgraded already. This is kind of a legacy muni portfolio that's been on the books for a number of years. These were, a majority of which were put on prior to my arrival, so, say, in the late '90s and early 2000s vintage.

There have been some downgrades, but it's still, there's only one bond in there that is not rated at this point. Every other one is investment grade.

Okay, so there should be no markdown on the portfolio as they become sold?

Correct.

You mean you'll sell them at book value or something?

Right, right. To the extent we can, yes.

To the extent you can. Okay, that's fine. And I guess the final question is, there's been no loan loss provision, I think, for three quarters now. Do you expect that to continue through the balance of the year?

We do not know. It all depends on many of the situation becomes valuation (inaudible) see. In this particular quarter, many of the valuation reports we receive is kind of a positive, and which reduce the reserve requirement of some of the (inaudible) assets. So we had our assets reduction in the first six months, and largely in the area of construction land loans, which are heavily reserved. We also had many of the loans, especially in the construction loan, being paid down. These loans are also heavily reserved. As they paid down, it released the reserve.

So all these have been reapplied to the relief of other situation. And the feeling that we don't do much new loans nowadays and also that the migration into nonperforming loans is almost negligent in the second quarter and an improvement in the past due accounts, there is no need for us to do any provision in the second quarter. Which is not to say the third quarter it will be the same. That depends on the valuation reports we're going to receive.

Okay. If there was, hypothetically, a loan loss provision in the third or fourth quarter, what loan type do you think it might come from?

We cannot predict that, John.

Oh, okay. Very good. Thank you.

Thank you.

Thank you. And our next question is a follow-up question from the line of Joe Morford with RBC Capital Markets. Please go ahead.

Thanks. I guess somewhat of a follow-up to something on that last question. I did notice that C&I balances were up $14 million, or about 7% sequentially from March. Was that just increased line utilization or something else driving that, and what your expectations are?

There's a couple of small loans we booked. Other than that, we've also, a little bit line increase usage by our customers.

Okay, so a couple of loans you purchased, you're saying?

No, we booked.

Oh, okay.

The other (inaudible).

Yes, okay, got it. All right, thanks so much.

Okay.

Thank you. And our next question comes from the line of Julie Balicka with KBW. Please go ahead.

Good afternoon.

Hi.

Hi, how are you? I have a quick question. In terms of your loan portfolio--and I'm sorry if you already mentioned this and I didn't quite catch it--I'm thinking about your balances going forward. Excluding the natural run-up of any nonaccruals, et cetera, that's still there, what is the natural portfolio turnover in your books of the two paydowns, repayments, et cetera?

Julie, is that--this is Louie speaking--historically, in the past, we would have had probably a normalized run rate that we could speak to. Certainly, in the last eight to twelve quarters, it's been anything but normalized. And so it would be difficult for us to try to come up with a projection on what that would be.

As we answered the question before, we are noticing, with a little bit of a stabilization of the real estate market, that we are getting some more line usage in our C&I portfolio. And so we're getting mixed results as far as utilization of certain portions, and then loan demand actually coming back a little bit in areas, and the continued runoff due to construction loan paydowns.

So I guess that's probably the best way I could answer that. Until we get more stabilization going forward, it would be hard for us to predict what that would be. But we certainly do not see a significant change or a deterioration on the assets.

Right. No, no, I was going along the lines that if there is no loan growth or any new loans, just on the downside scenario, what would be the natural--because I know you want to keep your loan balances flat, but if the macroeconomic environment is such that it doesn't allow for originations to offset paydowns, I guess I was just trying to figure out what's the downside here in your portfolio at this point?

First of all, we don't really calculated that one, so I probably cannot answer that question. And also, second situation, we are constantly working very hard in sourcing some recent very qualified loan to try to get our loan book maintained.

Julianna, maybe--this is Ed. One thing that we found that was very interesting over the course of '05, '06, and '07 is that the paydown in the loan book was, it was a little bit erratic, as Louie talked about. But also, it was very, very chunky. As you recall, the portfolio's not all that granular. And so at that time, what was going on, is you would get a particular credit or real estate or C&I credit, we'd get taken out of either by a conduit lender or by another bank, resulting in a large paydown. And then you would have other credits that would renew with us. And so trying to predict who's going to renew with us and who's going to get taken out was very difficult.

Now, obviously, that's changed a little bit. We're obviously not seeing as many credits getting taken out by other lenders and refi'd, and so I think from the standpoint of the paydown of the book, it might be a little more stable now at this point, simply because we don't have eight different lenders chasing our good customers and our good borrowers trying to refi their properties.

Okay, that makes sense. And approaching this from the other side, what were the new loan originations in this quarter?

Louie, do we have numbers?

I don't have those numbers available. I could tell you at this point, we're getting requests and we're looking at term sheets. We have not booked a significant amount during the quarter. I can provide that, and we'll get that at a later date.

And at what price are you offering new C&I loans?

Again, it depends on the credit quality of the customer, the deposit relationship, and pricing is always a very--again, a complicated matter when you're trying to look at overall profitability. Generally, we're maintaining a floor rate, and we have floors in all of our new C&I loans, clearly providing for an acceleration of our NIM going forward. Generally, we're, again, well above what our cost of funds is at this time.

So do you have that floor rate that you can provide for us?

Let me put it this way. We probably seldom would do a floor rate less than 5, or probably, it's very hard for us to get a floor rate over 7 at this point in the marketplace. As far as between that particular range, it depends on what kind of deposits we're getting.

Okay, that makes sense. And final question, and then I'll step back. Of your deposit book right now of your $1.1 billion in deposits, what is the balance of deposits in there that are not customer relationships, meaning things that come from, like, CDARs, brokered California deposits, deposits from other banks, the whole gamut of non-relationship deposits? And I know some of the jumbos are relationship deposits, so I was going for the--not trying to exclude those, but just the others.

Julianna, first off, we consider the CDARs deposits as relationship deposits, because they may not be the actual dollars, but that they do represent relationship deposits. And on that front, we're actually having some success of our customers coming out of the CDARs program and back into the bank, simply because of the capital that we've raised and because we also have additional collateral as well for local agencies.

At this point, the non-customer money is under $200 million, and that represents brokered money, as well as some deposits gathered via Internet hosting services.

Very good. Good to hear. Thank you very much.

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

Good afternoon.

Hi, Don.

Just a couple more minor things on the expense line. I assume that the $3.8 million write-down on the REO is part of this real estate-related expense.

Yes, Don. It's directly attributed to it. We added an escrow at the end of the quarter. We had hoped it would close by the end of the quarter. Obviously, it didn't. But because it was an escrow and because we knew the price and everything was set, we recorded the charge in Q2, even though the property didn't close until Q3.

Okay. And then in terms of just the Other line went up a little less than $1 million, anything in particular in there, in the 2.8?

Yes, it's a little bit of a catch-all. As we indicated in the press release, FDIC assessments, because of the order that we've been under, our FDIC assessments have risen substantially when you compare it, even on a linked quarter, and certainly when you compare it on a year-over-year quarter. In addition to that, as you would imagine, D&O premiums for insurance have increased, loan collection costs, attorneys' fees and so forth that we use to foreclose on properties, go after bankrupt borrowers, et cetera, et cetera. All of these things have contributed to the increase in that line item.

Okay, great. Thanks for the color.

Sure.

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

Thank you very much for attending the conference. As we said to you earlier that we remain most focused on continuing to improve our assets quarterly, and hopefully that our activity will be equally as positive in this quarter, in the future. Well, until then, we'd like to say thank you, everyone. Bye-bye.

Thank you. Ladies and gentlemen, this concludes the Preferred Bank second quarter 2010 conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030, or 1-800-406-7325, and enter the access code of 4331169, followed by the pound sign. Thank you for your participation. You may now disconnect.