Preferred Bank (PFBC) 2010 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Preferred Bank fourth quarter 2010 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, Monday, January 31, 2011. 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 preliminary results for the fourth quarter ended December 31, 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 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 Company's documents that are filed 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?

Good afternoon. For the fourth quarter of 2010 we recorded a $10.4 million of loss. Major items in the fourth quarter are $12 million of credit costs, roughly $1 million in sale of loan losses, $0.7 million of sale security losses, and $1 million-plus of reversal of interest income that was previously recorded.

During the quarter, we had reasonable progress in the area of troubled assets that were having liquidation process. And we sold, corrected, and charged of a total of roughly $40 million in non-performing loans and non-performing assets. However, in the quarter, we provided $57 million of new non-accrual on the book,$17 million of which are the -- loans are found to be interest non-current. And at the year end we decided to put nearly $40 million of interest current -- or payment current loans as non-accrual. And within the press release with the detail, describes these loans.

To the extent any of these loans, if not all of these loans, would become good loans at the end, the effect will be deferring current-day income interest reversal at the later date at the conclusion of loans. And we are working diligently to see to bring the conclusion date as early as possible. Now, these are really the major items for the quarter, and I'd like to open the question-and-answer period.

Thank you, sir.

(Operator Instructions)

And our first question is from the line of Aaron Deer, Sandler O'Neill & Partners. Please go ahead.

Good afternoon, guys.

Hi, Aaron.

I guess -- disappointed to see the new NPA in-flows but I do appreciate that you put the color behind those in the release, and I guess that gives me some comfort that the loss content there is little, if any. But, Louie, maybe if you can talk a little bit about what you saw on the portfolio that was existing, as of September 30, and why we didn't see more improvement there? And, can you talk about what percentage of loans, and I guess OREO, as well, that might be situations where you're not the lead bank and you're waiting on the lead bank to kind of correct the credit?

Yes. No. Thank you for the question. I'll be happy to. Again, during the quarter, we're looking at various underlying credit fundamentals on the loans of payment performance, obviously, updated appraisals. We did not see -- and if you see it on our delinquencies, we did not see a change in the actual underlying performance of the credits different at year-end than it was on September 30. From a payment performance, I think there was again, just a more -- as an abundance of caution, a more conservative approach on the reporting or the classification of these credits, not necessarily the underlying credit fundamentals of the loans. I think it was astute of you to point out that, when you were reading through them, you didn't necessarily see the loss exposure content. Because, again, that is another element, I think when you look at the provision we took, that it was not a significant change from that standpoint.

As far as getting to the participation, it's -- we've worked through, as we've disclosed in the past, a substantial percentage of our NPAs and charge-offs, especially in 2009, to a lesser extent in 2010,a result of participations purchased. I can go through -- currently we have about $110.7 million of participations purchased left in the balance sheet. Of that, $69.8 million is Shared National Credit-related, $40.9 million is non-SNC related. Of that $100.7 million, we have $21.2 million which is on nonaccrual at this time, and $7.8 million of that is Shared National Credit related and $13.4 million is non-Shared National Credit related.

In terms of ORE, I don't have the exact numbers in front of me, but it's roughly about 25% of our ORE is still where we are not the lead. However, we are working very collaboratively with those lead institutions in order to ensure the most timely as possible and efficient disposition of those properties.

Okay. And, then, on the OREO, it looked like the ongoing, if you will, operating expense related to that was pretty high in the quarter, I think it was $2 million. Is that -- should I be reading that as an ongoing thing? Or was there something outsized tied to that, beyond just changes in valuation?

Yes. We underwent some internal reviews to make sure that we had been caught up in the various areas of ORE, the largest of which being taxes. And we caught up on some taxes that we needed to pay on certain properties that we had both taken back during the quarter, and some that we had taken back throughout the year that -- in our internal review to make sure we're completely caught up on that. We reviewed that and paid those. So, that's not an ongoing quarterly type -- it is a cleanup of some issues that we handled internally.

-- the numbers (multiple speakers).

Yes, we actually paid $1.5 million in property taxes during that quarter. And, we changed our internal responsibility of who is reviewing ORE taxes and the accounting and internal record keeping of that, given the -- what we discovered during the quarter.

So, don't read that into as a full year ongoing expense of the $2 million.

Right, right. Okay.I'll step back. Thank you.

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

Thanks. Good afternoon.

Hi.

I guess, first question, just, the title of the release said Preliminary Fourth Quarter Results. Is that just awaiting a final exam report? Or is there something else I missed here?

Well, we, as a matter of fact, we generally don't make any comments regarding our -- it's a corporate policy -- prevents us from making any comments regarding the examination and so on and so forth. But, included in our press release there is at least one item we are not 100% sure, which is a loan E, as we described it.

And, as the good auditors -- KPMG starts to consider going through the books, going through the audit process, they may come up with more or less things, adjustments, and so on. So, in every year, as of the end of the quarter, when we report, we always say preliminary date. You'll probably find our last the same way.

Okay.

Ed, do you have anything to add?

Just that we're still -- there's some technical determinations being made with respect to one of the nonaccrual loans, which we disclosed. I think it's the last one on the list that Mr. Yu referred to.

Yes. Okay. That helps, thanks. In general, with these new loans coming on, as Aaron said, seems little if any loss content. And, given that you've just had an exam, is there any kind of change in tone of the regulators, or change of approach, in terms of what they're really considering or wanting as -- put a nonaccrual status, just -- whether it's because of a certain LTV or something?It just seems like in the past, these would not have been loans that you would have classified. So, I'm wondering it there's some kind of change in tone or message coming from the regulators here.

This is Louie speaking. Again, our corporate policy -- and, again, actually, federal law prohibits us from disclosing examination findings. But -- and we've -- are not saying that, that is a result of any kind of exam finding that we put those loans on nonaccrual. I think the important point is that, certainly 2009 and 2010, had a lot of uncertainty and questionability about performance. I think as time carries on, the economy improves, that questionability becomes removed. And, we will look forward to, and certainly hope, that, as that happens, those loans will be placed back on accrual and that today's reversals will be income in the future.

Okay. That's helpful. And, lastly, again another line in the release talking about 2000-level improving the pace of problem asset resolution. I guess, related to that, you did do a bulk sale of some problem loans in the quarter. Is that something you're going to be looking to do more of in 2011? And, just -- maybe, based on this experience, or other pools that you may have looked at selling, what kind of values are you seeing, or that bid as spread between what you think they're worth and what the buyers are?

I'd like to have Louie answer that. Before that, I will state in case in the past, we are not looking for bulk sale, because we try to maximize the capital -- preserving the capital in the institution. And, we have had reasonable success in terms of selling things, just with a small discount [Inaudible] of value. Having said that, I would like Louie to answer that in more detail.

Yes, I think it would be tough to tell from the press release, but actually, that $25.5 million was three separate sales transactions. We did not do bulk. And, again, we have various folks approaching us on occasion, and, as far as -- they see some of the intrinsic value in certain loans and properties, and we find that it's much better for execution to find a retail buyer versus a bulk. So, we have not done bulk, and we're not really entertaining that, going forward, given the fact that we were able to do $25.5 million on individual discrete sales during the quarter. So, we're comfortable. And, given the execution of those, we're comfortable with the amount and the price point of those.

Okay. Makes sense. Thanks very much.

Thank you. And our next question comes from the line of Joe Gladue, B. Riley & Company, Inc. Please go ahead.

Good afternoon. Couple of questions about the net interest margin. I guess -- little more contraction than I had expected. First off, you did do some, I guess, deployment of some of the cash on the balance sheet. Just wondering when in the quarter that occurred. Was that late in the quarter?

No. Actually, Joe it's been ongoing. And, it really started in the early to mid-part of the third quarter. And it's really just a continuation of that. At our peak, we had over $200 million in cash in the balance sheet, earning about25 basis points at the Fed. Looking at our liquidity situation, obviously, in light of the capital raise we did in June, it took away a lot of the uncertainty and it removed some of the liquidity risk from the bank. So, we decided to start deploying that. That happened in the third quarter and continued on into the fourth quarter.

In terms of the net interest margin, excluding the nonaccrual reversals, as well as the ongoing nonaccrual interest, the margins would have expanded pretty rapidly. On the liability side, we continue to have maturities of broker deposits and other higher cost CDs. Those are still rolling over at lower costs. So, we're seeing good things on both sides of the ledger, if you will. Obviously, the nonaccrual interest continues to get in the way.

Let me answer what's probably going to be your next question, Joe. So, during the quarter, the net interest margin, excluding the reversals of nonaccrual interest, would have been 324. If we also take away the effect of the ongoing nonaccruals, the ones that were there for the entire quarter, the margin would have been 3.84 for the quarter.

Okay. All right. And, I guess, just on, I guess, on the deposit side, you had a good quarter in the third quarter, particularly, in regards to noninterest-bearing deposits. But, looks like a little bit of a reversal this quarter. Any idea what's behind that?

From the production people's reporting side of it, it seems to be at the quarter end, the more people are drawing down on their cash, try to pay down their expenses to save income tax. And, most of the reduction is related to our business customers reducing their deposit with the bank, probably just to adjust their balance sheet or -- do their proper tax planning. And, many of the past years, they had the same nature. That fourth quarter seems to be a little bit lower.

Okay. I guess, turning now to the loan side, do you know what was the -- and pardon me if you touched on this before, but new loan originations in the quarter?

Hi, this is Louie Couto. Yes, we haven't touched on that yet during this call. We actually originated $30 million of new loans during the quarter. $23 million were CNI-related and $7 million was CRE-related. Of that, $3 million was owner occupied [theory]. The average -- again, generally, the average floors on our CNI credits are running between 5.25 to 5.75, and on the CRE, it's 5.75 to 6.25 to 6.5.

Okay. And, can you give us any color on what the outlook or the pipeline is as we stand now for the coming quarter?

Well, the pipeline is not robust. But, it is, under the circumstances, considered adequate. But, the thing is that -- a lot of slippage in booking these loans. In fact, it was in my original thinking that we should have $20 million more supposed to be booked before the year end. But, looks like it's going to fall somewhere in the first quarter. I would say probably we'll do at least that much, if not double the amount in the first quarter.

Okay. Just wondering, you had some good reductions in both the land and construction categories. Was most of that due to the sales during the quarter?

Yes, correct.

Okay. And, lastly, I'll just ask what was the balance of performing TDRs?

It's $20 million.

$19.9 million, I think.

-- to be exact.

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

Thank you. Our next question comes from the line of Julianna Balicka with Keefe, Bruyette & Woods. Please go ahead.

Good afternoon.

Hi, Julianna.

Happy New Year.

Happy New Year.

Say to me, now.

Thank you. I have a couple of follow-up questions and a good number of them have already been asked. On the -- of the lone portfolio, if we take away the nonaccrual reversal impact, within your loan portfolio, what is the average rate on your CNI loans, versus CRE loans, versus construction? I think beyond the current asset quality buildup. And, I just imagine your portfolio being remixed more towards CRE and CNI without construction. What will be the impact of the lack of those yields? What is the price, in yields?

We don't -- I don't have the detail on rates by type in front of me. But, I can tell you X, the nonaccrual impact, the average yield on the portfolio for the quarter was 573. In terms of the mix, construction versus CNI and CRE, I don't necessarily have a sense for that. I can't give you a real accurate answer, especially on the call.

Okay, that's fine. And, then, in looking at your call report, I noticed that your NPAs, there was a number of them popping up in multifamily or investors -- investor-owned CRE and residential, as opposed to -- and, of course, construction loans have been going down. So, I'm wondering if you can comment about the mix shift in your NPAs?

Well, I think we kind of detailed some of those in the press release as far as the loan A, B situation. What's actually happened is, we have performing loans that are -- again, and these aren't loans that are past due under 90. These are loans that are current, fully current. And, as a result of underlying elements other than delinquency, we chose to put those -- report those as nonaccrual. And, generally, those have actually been CRE type credits that -- and that's why they're current from borrower cash pay. You generally wouldn't see a loan where we would be indicating they are current from an interest reserve. They were construction.

And, so, you've seen the change in mix, certainly from last year to this year, where our NPAs, at this point, are more borrower current cash pay credit. Where, as has happened to everyone else with the economy and the general overall economic trends, borrowers are more challenged to be able to have the debt coverage ratios and the collateral coverage ratios that would otherwise be customary.

Okay, so it's a little bit just more of a trend -- of a bigger trend, as opposed to just one-off situations in any one particular loan.

No. I would say it's the other way. I'd say it's -- it's just those loans were described that actually came up. I don't see an overall trend shift or an expectation of more of that type.

Okay. That's very helpful. And, then, in terms of your cash and securities deployment. Of course, as your balance sheet continues to shrink, is there a point at which you're going to have the optimal securities portfolio? And is there a point at which you're going to start shifting -- within your securities portfolios, are you going to shift among different higher yielding instruments, or anything like that?

Well, I think, in terms of -- that's a good question, Julianna. And, I think in terms of deploying the cash that we had on the balance sheet over the last six months, I think we're getting pretty close to coming to an end to that process. We want to see -- obviously want to see what the pipeline does in terms of loan demand. Mr. Yu commented on that. We think that's going to start picking up a little bit.

And, obviously, as anyone on this call could relate to, we'd certainly rather put the money to work in the loan portfolio versus the investment portfolio. So, I think we're coming very, very close to the end of that deployment of cash.

Okay, very good. And, then, final question on the CNI loans that you mentioned you originated at $23 million. Of that $23 million, how much of that is from your existing borrowers just increasing their credits, and how much of that is new borrowers?

What Louie was quoting you, those are the new loans [Inaudible].

Right, but are they -- your preexisting borrowers took on a second loan or anything like that, or is this a brand new customer of the bank?

It's actually a combination of both. It's about 50/50. We have seen some ability to attract some new customers. And, we have seen some of our existing customers on a discrete basis borrowing and tapping their lines and increasing new loans for a little bit of expansion.

Okay, good. Last question, if I may, and I'm going to step back, please.What's your currently largest performing loan relationship that is not on any nonaccrual or any type of status?

It is $30 -- $28 million.

And, what kind of loan is that?

It's not a loan, it's a relationship.

Okay, but what kind of loans are in there?

Mixture of CNI and owner-occupied CRE. Very long-term relationship, very well-secured, both in real estate and CNI, as far as ability to cash flow, and has very large, substantial DDA deposits with the institution, as well.

Great. Thank you very much.

Thank you. Our next question comes from the line of Michael Howard with AllianceBernstein. Please go ahead.

Hi, good evening. Thanks for taking my call.

Hello.

Just a couple of related questions. The first is, we can see here the trend in nonaccruals, obviously. Could you provide, at least directionally, a sense of the trend in classified assets, both quarter-over-quarter and maybe year-over-year? And, then, secondly, does the increase in nonaccruals this quarter, does it really represent a mix shift within classified assets? Or, again, is there actually an increase in classified assets?

Thanks for the call, this is Louie speaking. We've seen an increase in classified assets, and, in terms of if you're referring to internal grading, we have seen a slight increase in that. But, it's actually been a shift because we've had -- year over year, it's decreased year over year but it's shifted away from construction into some other categories within the bank. But, overall, it's actually decreased. The nonaccruals generally -- and the change in that, were already existing classified loans, classified substandard credits.

So, the $57 million of nonaccrual in-flows, those were already classified.

Largely. I believe there was, perhaps, one or two of them that were not. But, generally, all of them were already classified.

Okay. That's very helpful, thanks.

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

Good afternoon.

Hi, John.

I was just curious, in response to a prior question, you said the performing trouble debt restructurings were about $20 million. What were the total trouble debt restructurings at the end of the quarter?

It's $54.7 million, of which $34.7 million are on nonaccrual and $19.9 million are on accrual.

I'm sorry, and $19.9 million were on -- ?

Accrual.

Accrual. Okay, so the portion that's not included in nonperforming assets would be that $19.9 million?

That's correct.

And, what was the total number a year ago, and as of the end of September?

September, it was fairly the same. It was pretty much the same number, as of September. I don't have the year ago's number right in front of me. Okay. Last year it was actually -- as of last year we had $34.9 million of TDRs, and pretty much all of them were on nonaccrual at that point. And, as of September, we had $52.9 million and $21.1 million were on nonaccrual as of September.

Okay. Great.

In other words, the DDD accrued portion has been TDR, has reduced from $32 million to $19.9 million.

That's correct.

Right. Okay. Very good. Thank you.

Thank you.

(Operator Instructions) And, our next question is a follow-up from the line of Aaron Deer with Sandler O'Neill & Partners. Please go ahead.

Hi. Just a quick follow-up on the tax rate in the quarter. It looked like there was a small tax benefit. I just want to check to see if that was -- I'm guessing that's an adjustment to the DTA. And, then, can you confirm that, as we're thinking about things going forward, that we should expect there to be a zero tax rate until you've shown several quarters of profitability, at which time we might expect to see that that DTA written back up?

Yes, in answer to your first question, Aaron, when we placed the valuation allowance in the DTA at the end of 2009, a portion of that valuation allowance was related to our negative mark to market on investment securities held for sale. Over the course of 2010, as we have sold certain investment securities, provided that we specifically identify the mark on each of those investment securities over the period of time, we get to realize, or I should say, reverse out the part of the valuation allowance in the DTA. So, that's what you saw in P&L for Q4.

Going forward, your assumption is correct. We need to show some consistent profitability. And, essentially, NPA's down to a level where there's not really a forecasted impediment to earnings going forward. At which such time we will get to reverse part of the valuation allowance out, subject to the section 382 change control rules. And, then you're correct, we will have a, obviously, a somewhat of a normal tax rate going forward after that.

Great. Thank you.

Thank you. Our next question is a follow up from the line of Julianna Balicka with Keefe, Bruyette & Woods. Please go ahead.

Hello. Thank you for letting me come back to the queue. In your press release, you mentioned a consent order that was entered in March 2010. Could you update -- now that we're coming close -- now that we're in the new year, could you update us on the next steps in order to get that order lifted?

We wouldn't know at this point in time.

Okay.

We have no clues what's going to happen, no.

There's no further trigger point, if that's what you're asking. The capital and everything and the policies we reported in the past, we've omitted those policies and we've done what they've asked us to do. And, so, there's nothing we could do any further besides wait for their determination.

Exactly. So, you guys have met all your requirements. So, basically, a year after, they just do a final reexamination and, basically, it hopefully lifts, right?

From your mouth, Julia.

We hope what you said is true. Thank you for the well wish.

Very good, yes. A very good wish for the new year.

Thank you.

And, then, a quick accounting follow-up, I was looking in your call report for the OREO write-down --sorry, in the memos. It looks like it was really high this quarter. I was wondering, what's the difference between call report and GAAP reporting? Why the call report data looks different from the GAAP?

I'll have to look at that, Julianna, and get back to you.

I appreciate that. Thank you very much.

Thank you. Our next question's from the line of Christopher Kliner with Taylor Asset Management. Please go ahead.

Hi, good afternoon.

Hello.

Industrial Commercial Bank of China has agreed to buy 80% of the Bank of East Asia's US subsidiary. And, I'm wondering if you guys see this as the start of a trend of Chinese institutions buying into US banks? And, have you had any discussions with any Chinese financial institutions?

Thinking about my heritage, it seems to me that I'm the logical person to answer that question. And, truly, this is one topic that has been discussed between myself and many investment bankers, and many of my colleagues, and many of the people from the Far East. Okay? It has -- from what I understand, it has always been a strong interest from China to come into this country. It's the unfortunate thing, they're not official MOUs being established between Fed Reserve and the Chinese banking authority.

So, it is reported that many, many of the second line banks -- the public banks in second line cities and so on, was pretty large asset space, are all interested in coming from their country to overseas, and the United States certainly is one of them. Some of us, my colleagues in the Chinese banking side, are expecting that activity to start within five years, if not three years.

Okay. Thank you.

Your next question is a follow-up from the line of John Deysher with Pinnacle Value Fund. Please go ahead.

Just a follow-up on the securities portfolio. Are we through most of the losses in that portfolio? I know, Ed, in the past, you've given some color in terms of valuations and where we stood with those. Is the loss that you took in the fourth quarter the culmination of that, or what would your expectations be going forward for the securities portfolio?

Well, it's tough to prognosticate. First off, John, I want to say we did -- and for the benefit of the rest of the listeners, hopefully, you're still on the line, we did sell one of the trust-preferred CDOs during the quarter. And, that was actually one of the reasons we received and we booked -- you saw the tax benefit that I believe Aaron had alluded to earlier.

Going forward, it's really difficult to tell. We do, as I've indicated before, a very detailed, thorough analysis all the underlying issuers, which are almost all commercial banks, some insurance companies, on a quarterly basis.We're not seeing the types of deterioration we saw even six, nine months ago, in terms of underlying banks either deferring their trust payments or defaulting all together. So, the -- I should say the trajectory is not as bad as it was.

The thing that really remains to be seen is, a number of the banks that are underlying issuers in these pools have re-capitalized their institutions. And, so, on that front, what we'd like to see and what we're still waiting for on some of them, is for them to begin to reinstate their trust-preferred interest payments again. I think some of them probably cannot right now, simply because of regulatory restrictions. But, we would anticipate some to in the future which, obviously, will help the valuation of these pools. With that being said, it's really hard to say, going forward, John, what the expectation is. I guess it's probably better now than it has been at any time over the last year and a half.

Okay. But of the securities available for sale at fair value, $183 million, what percentage of that is trust preferred?

Only $2.4 million book value are these trust-preferred CDOs, so a very, very small piece.

Okay, so it's really dwindling. All right, thank you.

Yes. I also want to say -- in response to Julianna's question earlier regarding the valuation allowance in the OREO, the valuation allowance item in the call report is on a year-to-date basis, whereas our disclosure in the press release was valuation allowance just for the quarter. So, I think that may answer that question.

Thank you.

(Operator Instructions)

And, Mr. Yu, I'm showing no further questions at this time. Sir, please continue.

Okay. Obviously, the number one mission of the management is to reduce our nonperforming assets, our troubled assets. And, I see certain areas, possible bright light of those things. First of all, you know that the TDR, which is performing TDR, has reduced from $34 million September 30 to $19.9 million in our December 31. And, I do expect most of those $19.9 million, if they continue to perform as agreed, most of them will -- come out of the TDR, become normal loans within the next six months period of time.

And, we have identified a number of nonperforming loans, and we're working on that in an effort to reduce it in the first and second quarter. Including that the newly placed $39.9 million or $40 million cash current nonperforming loans, we're working on methodology. Hopefully, that can bring to a early -- back into accrual status. And, currently, we have a number of OREO assets currently in place. And, normally, not everything in play will be closed. But, we are hoping a reasonable number of transactions will be closed in the first quarter and the second quarter.

So, it is really our most important mission, operationally speaking, that we think we're structurally profitable, we just have to keep on operating on a prudent basis. Okay. With that, and being an Asian, being a Chinese, I wish every one of you a Happy New Year and a very prosperous new year for all of us. Thank you.

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 4405559 followed by the pound key. This does conclude the Preferred Bank fourth quarter 2010 conference call. Thank you for your participation. You may now disconnect.