Preferred Bank (PFBC) 2010 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Preferred Bank Third Quarter 2010 Results Conference Call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Thursday, October 28, 2010.

And at this time, I'd 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 results for the third quarter ended September 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, Executive Vice President. 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 document 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?

Good afternoon. For the third quarter 2010, we reported gigantic amount of losses. However, of which $25.5 million really is not a loss by our own definition. It is related to the conversion of preferred stock into a common stock and the conversion rate is difference between conversion, price and the market value. The difference is treated as dividends to the preferred stock shareholders and therefore created a loss to the common share.

It did not change the total capital amount that we raised. It did not change the capital ratio. It did not change TCE, and it is not operating loss nor it is a cash outflow item. Having said that, the remaining amount is relating to our operations. As I stated in the press release, in the third quarter, we have received a Shared National Credit report and in that is the many items that previously was identified as impaired loan and classified loan was further downgraded to non-accrual and also that required reserve was recommended to be increased and recommended to be written off. And we so do accordingly, according to this recommendation of the report.

Although that, as I also said, many of the loans are currently still current and in our own humble opinion our visibility at this time that we probably collect all interest and principal at maturity, but having said that, we are making this reserve. Now, the third quarter has been a very, very disappointing quarter for me personally because I was really thinking about there's a whole lot of loans being resolved or being sold or being corrected, okay, and high yielding so. But this has a number of different things as part of escrow or part of the negotiation table that resulted only a limited amount of improvement of the NPA even though it's roughly $20 million some [equal to] over 14% of the NPA amount.

We were thinking of a lot bigger amount. However, the 14% improvement also taking into consideration about $17 million that was recommended to be non-accrual for the quarter, okay. But having said that, our progress is continuing and is still on target, as we internally are measuring it and also that we hope with every dollar of the improvement in non-performing assets will be corresponding improvement in net interest margin and then also the operating cost of the bank.

So with that, I'm opening up for questions you may have.

Thank you, sir. And ladies and gentlemen, we will begin the question-and-answer session at this time. (Operator Instructions) Our first question comes from the line of Joe Gladue with B. Riley. Please go ahead.

Yes, hi.

Hi, Joe.

Good afternoon. Let me start with, I guess, non-performers, can you give us the -- what the balance of TDRs were and maybe break it out between both accruing and non-accruing?

One of the things, so we'll give you the number right away, but our TDR is accruing. If it is non-accruing, it would have improved the non-performing loan category, okay. Louie, you want to answer the question?

Yes. At this point, we have about $29.8 million in TDRs that are accruing. Our non-accrual loans actually that we reported, it's about 50% or actually not 90 days past due of that actual non-accruals either because they've either been restructured or because the customer continues to pay under the original terms.

Okay. All right. I guess, thus far you had, I guess, a pretty big increase in non-interest-bearing deposits during the quarter. Just wondering anything particular driving that or just --?

Well, we obviously that in-house that we are working very hard as our goal to increase our core deposits and namely mostly the TDA accounts. And we have seen, a, that we have added several new accounts to our books and also, b, some of our customers, their operation is improving, therefore their cash flow is also improving [long term]. You have anything to add just to it?

No. That's what I was going to say. Well, the other thing too is, Joe, in light of the fact that we've raised the capital, what a lot of our officers are going out and doing is going out and getting back some deposit that may have been lost over the last year-and-a-half when our capital ratios were depleted.

Okay. And I guess while I'm on the subject of deposits, is there any, I guess, appreciable amount of deposits to re-price down that could benefit the net interest margin in the next quarter?

We would answer your question differently. Now, at the end of September we have over $190 million in cash, which is certainly a excess deposit based on our own internal assets and liability management. While in the one end that we'll be working on deploying these excess cash that we have on the hand. Also that some of the TCD that will mature in the fourth quarter include some of the brokered deposits, which we have mandated to not renew them. Some of the deposits will be maturing in the fourth quarter will not be renewed, okay, also which in a way reduces interest cost as deposits cost is much higher, TCD cost much higher than we are earning as a [difference in the overnight difference].

Okay. All right. Now, I'll step back. Thank you.

Thank you.

Thank you. Our next question is from the line of Matthew Lindenbaum with Basswood Capital Management. Please go ahead.

Hi. Thanks for taking the call. I got two questions. One, can you break out for us the non-performing loans and non-performing assets for the construction lend category? And also, do you have any OREO or things like OREO that are basically in contract that just didn't close this quarter? Thanks.

I will have Louie answer the question.

It's actually on page five it has the -- on asset quality table, we have our ORE and our non-accrual by land residential, which -- it's about $9 million in non-accrual, $24 million ORE, land commercial was about $2 million on non-accrual and $11 million in ORE. And then of our construction, we have roughly $31 million on non-accrual combined between residential and commercial, and then about $10 million OREs in the construction.

And then getting to your second question, yes, we continue to experience what we've experienced for a year-and-a-half, which is protracted negotiations in dealing with various parties and we have a lot of interested folks that come in on our ORE and unfortunately it's still something that we're seeing in the marketplace where folks want to negotiate even after deals have been signed. And we're seeing that that's dissipated a little bit, I think, because of the stabilization of real estate values, but we're still seeing that. So, yes, we do have various transactions in stages of resolution and we expect them to finalize.

Do you except the net interest margin to continue going up or do you think the roll-down of CD rates is going to be offset by pressure on asset yields?

No, actually, our assets yield is improving. And, Ed, do you want to answer the question? Matt, I would later on answer your question on the things rolling out of contract little later.

Okay.

You want to do that?

Yes. Hi, Matt.

Hi.

We've continued to believe that there's a lot of upward pressure on the margin going forward simply because of the things Mr. Yu talked about, namely the deployment of all the excess cash we have on the balance sheet, which we are working to deploy, but as you can imagine this rate environment is very difficult to find.

Right.

Short duration, decent yield and good credit. So that's the difficult one. The other thing is that, as Mr. Yu alluded to, there is brokered deposits that are going to be running off, which aren't going to be renewed. Those got paid down with cash, so that's a net bump to the margin as well. What we saw -- what we would have seen with the net interest margin in Q3 would have been about a 3.20% margin, which would have been a decent improvement.

But with these -- the $70 million of SNC loans that we were required to place on non-accrual, again, put that downward pressure on the margin. But again, barring -- obviously there's not going to be a SNC report for another year. And the fact that we only have $5 million of loans in 30 to 89 day past due at this point, we're hopeful going forward into Q4 and certainly into the first couple of quarters of 2011 that we'll see, I don't want to say significant margin increase, but we will certainly see some up to between probably 3.25% and 3.40%.

Great.

Matt, to answer the earlier question about things (inaudible), you could just -- this is from just purely operator's point of view. We have -- in May, June, July, I'm so optimistic about many of the loans and OREO that was in contract, it's going to go through, okay, simply because the market momentum is there. And frankly speaking, it was the real estates again slow down in the months of July, August and September, okay. Many people have decided to either wait or renegotiate or recreate that in a most cautious way. So, a number of things (inaudible). Previously I for one was hoping that we were reporting a significant improvement in our troubled assets liquidation.

Great. Thank you.

(Operator Instructions) Next question comes from the line of Aaron Deer with Sandler O'Neill & Partners. Please go ahead.

Hey, good afternoon guys.

Hi, Aaron.

I haven't had a chance to entirely go through the release. So forgive me if you said this, but in there -- Ed, did I hear you correctly, you said that without the SNC your margin would have been 3.23%, is that right? Is that a (inaudible)?

About 3.20%. About 3.20%.

3.20%, okay.

Yes. And the full effect of all the non-accruals would have put it close -- without the full effect of all the non-accruals, the legacy ones would have been about 3.50% net interest margin, Aaron.

Right. And are you speaking of interest reversals in the quarter, or are you talking about just the pressure on the margin because of the lack of full repayment?

Well, in the 3.20% margin, it was just the effect of the interest reversals.

Okay.

The 3.50% margin is the effect of the reversals plus the legacy non-accruals, loans that are still continuing to be calculated in the denominator, but we don't get interest though.

I understand, okay. And then the -- what is the volume of CDs that are maturing in the fourth quarter?

It's about $30 million.

Okay. And lastly, obviously there has been a fair bit of balance sheet shrinkage over the past several quarters. With your capital levels back, I would imagine that you've got your lenders re-engaged, I'm wondering if you're starting to get any traction on new originations and when we might see an inflection point on loan balances and start seeing some growth --?

Well, actually, loan balance will probably be increasing depending on the timing of booking the loans. The trends will be increasing, but there will be other utilization of the excess cash, I mean, cash balance that we have. So whereas the total assets may not change all will be reduced by the rate renewal of the brokered deposits and other deposits where the loan balance could actually increase.

Right. So what -- maybe you can give a number of what the new originations were in the quarter and what your outlook is for the fourth quarter?

Yes, I'd be happy to. This is Louie Couto. Good afternoon. For the quarter, we had $47.5 million of new loans originated, $35 million was roughly in CRE and about $12 million of C&I loans. Generally, again our CRE credits were giving anywhere between 6% and 6.5%, and our C&I are a little bit less obviously because of the substantial deposit balance as they come, but generally we're having floors of 5.25% to 5.75% in the C&I credit.

Great, that's very helpful. I appreciate it.

Thank you.

Our next question is from the line of Joe Morford with RBC Capital Markets. Please go ahead.

Hi, Joe.

Thanks. Good afternoon, everyone.

Hi, Joe.

I guess, first to say, can you remind us the size of the portfolio participations that would have been reviewed by the Shared National Credit exam, and was that attributable for most or if not all of the provision in the quarter?

Yes, Louie, you want to answer that question?

Sure. As of September 30, we have $88.2 million in Shared National Credit, of which about $48.7 million are C&I and $39.5 million are real estate related and that's generally what the SNC report reviewed. Of that $88.2 million, about $24.3 million was actually impaired. Mr. Yu had made a comment before regarding the actual payment status and in fact, of the $17.7 million that the report recommended we put on non-accrual, he had indicated most were current, in fact that all of them are current and to this day they're still current. And so, I believe that's something -- an important point that needs to be made and those are cash pays from the Company.

Okay.

Next question is how much reserve is (inaudible) from this SNC report.

Yes, the reserve -- the additional provision in the third quarter for the Shared National Credits was $6.1 million.

$6.1 million, okay. So the three balance would have been for the legacy or the remaining portfolio?

That's correct.

Okay. And then the separate question just on OREO cost in the quarter, fairly modest and it looks like a small piece of that or I guess most of it was valuation charges, but still overall a pretty modest amount. In general, with the OREO stuff that you're moving out, it seems then it's pretty close to where you have them written down on the books and kind of what's your expectation there?

Well, we -- I don't know -- we're not updated with the current quarter yet, but up to June our liquidation has been almost $0.91 to $1, okay. So that was the old numbers that we had. Now, going forward, a lot depends on what the market trend is going to be. Because in some assets we have on the book, actually we're carrying in the lower, much lower than the appraisal value, but yet again in actual negotiations things, especially we have other banks involved in multi-party negotiations. It may or may not resolve in a month that equal to or better than the appraisal value. It is hard to tell, but only the economy going forward would dictate what the final results value would have. But having said that, let me confirm again, in the past up to June, our average liquidation price is $0.90 -- $0.91 to $1.

Okay. That's great, Li. Thanks so much.

Thank you. Our next question is a follow-up from the line of Joe Gladue with B. Riley. Please go ahead.

Yes, hi. Just one thing I forgot to ask the last time. Could you give us the level of 90 day past due and still accruing loans?

That would be zero.

Okay. That was it. Thank you.

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

Good afternoon.

Hi.

Hi, Julianna.

Hi. How are you?

Okay.

I have a few follow-up questions; a lot of them have already been asked. On the originations in terms of the $35 million CRE that you referenced, is that owner occupied or how do you stand on the 300% threshold of CRE to capital? Although with your new capital raise that might be a total non-issue, [so that's why]?

Yes. No, I'll be happy to answer. Most of those actually were not owner occupied. Our 9/30 numbers after deducting owner occupied are going to be slightly above the 300% guideline that the regulators have in order to have a more robust stress testing of the portfolio. That's actually from my reading what the guideline is. If you're over 100% in construction and 300% in CRE non-owner occupied, you're supposed to have more robust monitoring of the CRE and stress testing, both of which we actually do here internally.

The numbers I haven't -- that you [bid for] is not available yet because we haven't filed our current report. We'll be doing it on Friday as required. But again I project it's going to be slightly over the 300%, but clearly as you pointed out because of our capital substantially below what it was in years past and substantively in line with the ratios that the regulators are looking for.

Julianna, as a just reference point, with most of the people that you cover that we take a look at it and we're the second lowest. There's only one banker is lower than us in the CRE concentration.

That is true.

Yes. So you might say, we're 1%, 2%, 3% over the regulative guideline, but we are 100 basis points lower than some of the people you cover at all.

Very good. And then talking about the originations, can you kind of talk a little bit about declining your C&I balances, is that like seasonality or what's the line utilization of your borrowers or can you just talk a little bit more about your C&I?

Same answer as we have as of June 30. Most of our borrowers tend to be much more conservative than they used to be, okay. The draw-down on the line, I mean, is lot less than in previous years. We do not have any defection of our customer in the C&I sector. In fact, as you see, we added $12 million to our C&I commitment. But it is, the utilization has been down.

Yes. As Ed brought it before, we actually -- they're also depositing more into their DDA. So it's having a positive effect on their deposit balances as a result of their cash.

Okay, that's helpful. Thank you. And I think that -- oh, and then the final question if I may. What is -- of your total loan balances of $934 million, what -- can you refresh our memory what the participation dollar amount is?

It's slightly over $100 million, $88 million of which is the Shared National Credit.

Great. Thank you very much.

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

Hi, everyone.

Hi.

Hi, John.

Couple of questions. One, on the OREO sales of $17.8 million, what percentage of that, if any, was financed by the bank?

A large percentage of that was -- it was a CRE loan.

Okay. So a large percentage of the $17.8 million was embedded in the $35 million of CRE?

Yes. That is correct.

Okay. What kind of loan-to-value ratio was there?

Yes. We received in excess of about 25% of cash down payment. So it was in the 70% to 73% loan-to-value.

[Probably] if we want to use the appraisal value as a guidance, the loan-to-value will be less than 70%.

That's correct.

Because the transaction price is lower than the appraisal value.

Slightly. Yes, that's correct.

Okay. All right. That makes sense. And the $12 million increase in C&I loans, roughly speaking what kind of credits are those that are actually increasing their loans?

Well, as far as the industries that --?

Yes, the industries.

Again some of that is trade finance, I don't have all that information, but service, trade finance type loans.

Okay. And then on the deposit side, Ed, I think you said about $30 million of brokered deposits are going to roll over in the fourth quarter.

Yes.

How much do you expect to roll over in 2011 and could you give us a -- if you have it, a rough breakdown in terms of how the quarters unfold?

It's about -- I think it's just slightly under $50 million for all of 2011, John. It is a little scattered, most of it is in the first and second quarter. I think there's almost nothing in the third quarter and then there's a little bit in the fourth. So the preponderance of the $50 million is in the first two quarters of 2011.

Okay. And would you say that would be approximately even or is it more skewed towards the first quarter?

I think it's about even, yes. I think it's about even.

Okay. Very good. Thank you.

Sure.

Thank you. (Operator Instructions) Next question is a follow-up from the line of Matthew Lindenbaum with Basswood Capital Management. Please go ahead.

Hi, guys. I can't get enough. I need if you got at the Tier 1 capital in dollars at the end of the quarter, and also if you have the current balance of the DTA and the associated reserve? Thanks a lot.

Hey, Matthew, I'm going to have to get back to you on that offline.

Okay.

If that's okay.

The net value is nothing.

Yes, the net DTA is zero or close to zero.

Okay.

I'll have to give you the gross.

Okay. And the Tier 1 capital?

I think I'm going to have to give you that offline itself.

Okay, not a problem.

I don't have those numbers right now.

Not a problem.

Thank you. And gentlemen, I'm showing no further questions at this time. Please continue.

Hello? I guess there's no further question. And first of all, let me thank you for your interest in your questions. One of the things I like to add on to the situation, we are experiencing a gradual deposit increase also, which allow us to have better liquidity in the last three months and going forward as we think. And with that it's more than enough to -- with our current cash more than enough to meet the need of (inaudible) from the brokerage deposit and also the deployment to the new loans, okay.

So with that, I'd like to close our meeting, and then thank you very much for all your interest.

Thank you, sir. Ladies and gentlemen, if you'd like to listen to a replay of today's conference, please dial 1800-406-7325 or 303-590-3030 using the access code of 4376121 followed by the pound. This does conclude the Preferred Bank third quarter 2010 results conference call. Thank you very much for your participation and you may now disconnect.