Preferred Bank (PFBC) 2011 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Preferred Bank First Quarter 2011 Conference Call. (Operator instructions)

This Conference is being recorded today, Thursday, April 21st, 2011.

I would now like to turn the Conference over to Lasse Glassen of the Financial Relations Board. Please go ahead, sir.

Thank you, and good day, everyone. Thanks for joining us to discuss Preferred Bank's preliminary results for the first quarter ended March 31st, 2011. 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 will open the call up to 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 out of 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. Thank you for joining us. Good afternoon.

I'm pleased to report a first quarter profit of $700,000. It is small, but it's very precious to us in light of the large NPA which we have in our books.

The first quarter of credit costs [about] $3.3 million is entirely related to OREO. $600,000 was related to the sale or disposition of properties, and another $2.7 million is related to valuation adjustments or write-downs.

On the sales side -- the activity was satisfactory, as we are netting $0.94-plus on the dollar. On the valuation adjustment side -- it is unusually large. And I will discuss this matter at a later time. Total OREO was reduced 25% between quarters.

We did not have much dollar-amount improvement on our nonperforming loans, although a whole lot of groundwork has been done. As I outlined in the press release, I do expect some reasonable activities in our progress in the ensuing quarters.

Now, looking ahead -- we now have a favorable net interest margin, which [should] improve along with the reduction of NPAs over time. We believe our cost is under control. And the legal costs and OREO costs should further improve gradually, along with the reduction of NPAs. And a new assessment formula for the FDIC insurance premium should also benefit the Bank beginning the third quarter of this year.

Our capital is very adequate, and our liquidity is very satisfactory. But most of all, we retain a very, very loyal base of customers. So the only question we have right now is the credit costs in the future.

On the loan loss provision side -- at this time, I can only foresee a mild requirement for the rest of the year. This is partially because much of our construction loan portfolio is rapidly paying down. The proportionately large reserve that was assigned to this portfolio will be greatly reduced and released, and to be used by other loans.

However, having said that, we are always mindful there's one element that we really have no control. We still have [a] few Shared National Credit participation loan on our books. And it may surprise us in the third quarter, although we hope not. In any event, if it is negatively surprise us, I still expect our total loan loss provision this year will be much, much milder than the previous year. Also, we may even be pleasantly surprised with the recovery of some of the loan losses that was previously charged off.

On the OREO side -- I hope the future valuation adjustment will not be as severe as this quarter, although I can never be sure about the direction of appraisal reports. For instance, the March quarter's valuation adjustment -- $2.1 million of $2.7 million total is related to only one loan, which the appraiser has heavily relied on upon the -- we had one comp that was a FDIC loss sharing asset sale.

However, as of March 31st, we only have four pieces property [with] appraisal report that is older than three months but less than six months old. So we hope, and we think, we're pretty much up to date with that.

On the business side -- we booked roughly $70 million in new loan in the first quarter. But that was not enough -- because some of them [are] totally outstanding -- but that was not enough to offset the payoffs, pay-downs and the sale of the assets -- of the loans. So we had a net reduction in the first quarter of our loan portfolio.

Looking forward -- based on today's pipeline, I'm projecting new loan originations of $70 million to $85 million in the second quarter, which means we should have a increase in loan portfolio by June 30th. Most new loan booked -- the majority of new loans booked are C&I loans and owner-occupied CIE loans.

Thank you very much. Now we're ready for your question.

(Operator instructions) Aaron Deer, Sandler O'Neill & Partners.

Hey, guys, this is actually Andrew on for Aaron today. How are you?

Hi, Andrew.

Good. Good, Andrew.

Good, thank you. Good to see the profit in the quarter.

Just curious -- looked like land loans were up a little bit. Just kind of curious what drove that.

Louie, you want to answer that?

Yes. That was actually a longtime customer that we had some remaining disbursed, that was secured by land. It was actually about $500,000; it was not a major increase.

And then, what drove the decline in professional services fees? And is this a good run rate going forward?

It's interesting. At the end of the year, Andrew, we had a certain amount set aside in accrued liabilities for audit fees and other professional services. We had anticipated a much higher level of expense on through the first quarter related to the year-end audit. That amount of expense was never incurred, and so we got to reverse some of those accrued liabilities out. I would not take that as a run rate going forward; I would take it -- somewhere between Q4 of 2010 and Q1 of 2011, somewhere in there, in terms of the average for professional services, is going to be a good run rate for the next few quarters.

Great. That line in the press release was -- got it. Thanks so much. I'll step back.

Thank you.

Thanks.

Julianna Balicka; KBW.

Good afternoon.

Hi.

Hi, Julianna.

Hi, how are you?

Good.

I have a couple questions. One, in terms of your loan portfolio -- you mentioned $70 million to $80 million of originations that you are anticipating for the second quarter?

Yes.

In terms of your loan portfolio of $886 million -- what is the typical pay-down runoff rate, renewal rate, excluding any nonperforming asset-related movement?

We are anticipating [including] a nonperforming assets movement reduction about $40 million for the second quarter. But we think that the new booking will be $70 million to $80 million, so we should gain a little bit. Not all the $70 million to $80 million will be outstanding at quarter end. (Inaudible) --

So it'll be more like commitments?

C&I, yes.

Yes.

And are you seeing any increased drawdowns from borrowers [than] increased optimism, or --

At this point in time, we have not seen much increased drawdown.

What's the current rate that you have on utilization rate on C&I?

At this point, still hovering a little over 50%.

That's pretty good, actually.

Final question I have, and I'll step back -- in terms of your deposits -- what is the dollar amount of brokered deposit that you have, if any? And what is the dollar amount of the Internet source [pick] deposits?

Ed, you want to answer that?

Right now, Julianna, as of the end of March, we had about $40 million in brokered outstanding. I believe we had about $120 million in the Internet deposits. And of that $40 million in brokered, about $25 million matures actually before the end of April. So we'll have about $15 million left after that.

And what about the $120 million [that you have in] maturities?

That's all spread out throughout the course of 2011 and on into 2012.

Very good. I think that's pretty much all the questions I have. Thank you very much.

Yes.

Joe Gladue, B. Riley.

Hi, Joe.

Hi. I guess I'd like to follow up on Julianna's question on deposits. Just wondering about the decline in non-interest-bearing deposits -- a noticeable decline during the quarter. Was there any specific thing driving that?

I had been asking the question about our branches, our production staff, and so on. The best answer I have is -- other than one customer leaving us [is] about $2 million or $3 million that was related loans -- the best answer I can get is a combination of -- A, is [the] paying taxes? Many company is paying taxes before April the 1st. And some of the individuals paying taxes. And B -- seems to be there is -- especially among the Chinese people, there is a -- [the sports] going on called buying distressed assets. They like to buy real estate, and a lot of money's being spent in buying real estate.

All right --

And if you noticed, there is notable increases -- more than offset the decrease in non-interest-bearing -- that the interest-bearing core accounts is actually increasing.

Just continuing further on the funding costs, and net interest margin line -- is there much -- obviously, you talked about the maturity of the brokered CDs. But any other opportunities for reducing the funding costs over the next few quarters --

You might have some answers, Ed; I may have some answers. You want to start first?

Yes, I'll start, and hopefully you'll agree.

Yes.

Going forward -- in terms of funding costs, Joe, there's not going to be a tremendous amount of change. There will be a little bit of a dip as we pay off some of these brokered and some of the Internet CDs mature.

The other thing that happened during the quarter is we did run a promotion back in the fourth quarter of 2009. And a lot of those CDs matured during this quarter. And that's why you saw some of the reduction in overall CDs, as well as we had some brokered mature during the first quarter. So that has helped.

The other thing -- in terms of the margin going forward -- obviously, we were benefitted by the fact that there were almost zero new nonaccrual loans for the quarter. So the reversals of interest income were not there, as they have been in past quarters, specifically in the fourth quarter of 2010. That impacted us by almost 100 basis points on the yield side.

So absent that -- and obviously going forward, hopefully absent that type of extraordinary item -- I would expect the yield on the asset side to stay relatively stable. I do want to note that we were aided in the first quarter by a recovery of interest of about $260,000 on a previously -- on a loan that had previously been on nonaccrual that paid off, and we got the interest reversed. We got that back as well. So we were aided by $260,000. That benefitted the margin in Q1 by about 10 basis points. So on a normalized, it would've been about 363.

So going forward -- I would look for very slight margin expansion going forward, a majority of which is coming from small reductions on the funding side.

Just curious on the performing TDRs -- looks like there was a nice decrease from the fourth quarter. Was all of that due to pay-downs? Or did anything slide into non-accruing?

This is Louie, (inaudible), I'll take that one.

Yes, none of those slid into non-accruing. In fact, all the performing TDRs that were as of year end are either still performing -- and perhaps at this point they're at a market yield, and they're no longer reported as TDR.

All right. I guess that's all I had. Thank you.

Joe Stieven, Stieven Capital.

First of all, congrats on getting things back on track. And a number of my questions have been already asked and answered. But if you can go back to the NPAs for a little bit -- we saw some nice reductions in the OREOs. But I think as you've said, the NPL, the nonperforming loans, didn't do much. And you still have a good balance of those performing. When do you think you'll start to see those nose over and start making some significant improvements, as far as coming off the balance sheet? Thanks.

Joe, that's about the hardest question to answer -- this is Li Yu.

First of all, there's several reasons for those have been placed on nonaccrual. One of the reason is that when the loan is performing, and when you have a company [of] people -- seems to be capable continue to performing. But the valuation seems to be lower than current market value based on appraisal report -- seems to be lower than the loan. So they were put on nonperforming status.

Someday, in the future, when the valuation come back, that creates a base for us to consider it to put it on accrual. And that's one case. The other case is that when you have some loans [where] the valuation is good, loan is well-protected by collateral; but for some reason, we have doubts about the sponsor's continuation -- ability to continuation to pay the loan based on their so-called global cash flow. Well, if these people's global cash flow was showing the marked improvement, I guess that give us reason to establish the fact we can put it -- nonaccrual back on accrual.

But all this based on future events, and based on outside-of-control event. And we don't know where. And we just don't want to be criticized if we put it back on accrual.

Okay. But I guess -- I know it's --

But as a shareholder, that [was some] situations that I was always looking the silver lining -- maybe I'm just joking myself -- whatever interest we collect today become the profit of tomorrow.

That's correct.

And then, just on the OREO side -- you already said you've got a $2.4 million transaction scheduled to close in April. Do you have any other big pieces in there that are looking like you're getting close to some type of a resolution?

We have two pieces currently in contract, in ESCROW -- sometimes does not necessarily mean that it will close. Because past experience indicates a lot of drop-off from time to time [or they renegotiate]. But we do have couple pieces that is right at the value that we're carrying. Otherwise, it would've just went downward. And then once piece is much higher than the value we're carrying.

What size -- approximately what size are both?

You want to add the total up?

Yes.

I mean, tell me --

As far as total value, each one of those is slightly in excess of $5 million.

So that's, in total, $10 million. That's a decent amount.

And to add some color -- if, Mr. Yu -- your question was about -- of the $100 million we have on nonaccrual loans, about half is performing; the other half is not. And Mr. Yu touched on some of the difficulties of restoring those to accrual status. Of the ones that are not performing, the majority of those -- as I think we've outlined in our press release -- we are either in forbearance or have receivers in those projects. And we do anticipate movement on that portion of the NPLs in the next couple of quarters.

How much is that, approximately, in total?

Of the $52 million that is actually nonperforming, there's about $26 million we have forbearances on, where the projects are about ready to start moving. And there's another $16 million that's either in receivership and/or we are in the process of foreclosing. And so both of those buckets -- we anticipate movement in the next couple quarters.

Okay. I am going to put you on the spot. So if you look at your total bucket of all your nonperforming loans and OREO, which total about $140 million -- it sounds like you feel pretty firm that the directionality of that continuing to come down -- it's hard to say the exact pace, but let's just say at a pace something like you saw in the first quarter. Is that probably a reasonable thing for us to be estimating?

It is my personal desire -- again, as I said, some things not predictable. My preference, to myself, is that I want to reduce it much more in each quarter as compared to the first quarter.

Good. Well, we'd be happy with that, too. Thank you.

I'm in the same boat as you are. Because I need to see my stock up.

Okay. Good. Thank you.

(Operator instructions) John Deysher, Pinnacle.

Good afternoon, everyone.

Hi, John.

Hi.

Just a follow-up question, on the NPA migration chart -- what was the nature of the additions to the nonaccrual status? I think it was about $10.6 million. What types of loans were those?

Louie, you want to answer that?

Yes, I'll be happy to.

It was a combination. The largest, about $5.5 million, was housing for sale. There was -- about $1 million was a further advance on a construction loan where we're advancing to complete construction. And about $4 million or so was actually CRE loans.

Okay. In the first one, the $5.5 million -- I didn't quite catch that -- that was housing --

It's housing -- it's completed housing, ready for sale. And in fact, on that one, we actually have a December appraisal at $6.9 million.

That's single-family residences?

That is correct.

Do you expect it to continue? Is that kind of a normalized rate you would expect going forward?

It's hard to say anything is normal in this market. But I wouldn't necessarily believe that it would be that high.

Good.

The other question is on the taxes -- is that $325,000 tax bill a one-off situation? Or what should we assume taxes are going to be for the balance of the year?

It's tough to predict right now, John -- this is Ed. As we indicated in the press release, it's a -- that $325,000 -- actually, most of the $325,000 is related to AMT for the loss carry-back that went from 2010 back to 2008. It was discovered basically in early April of this year. That's why it was not a year-end issue for last year, because we didn't -- our tax people didn't get it.

Going forward -- we don't anticipate a lot of tax expense, if at all. But there's some trickiness here with regard to Section 382 and the change in control that we went through back in 2010, because of the large amount of stock offerings. So we have a limitation as to how much we get to carry back each year. So we're actually kind of working through that right now.

It really depends on the nature of our pretax earnings, and it depends on the nature of our taxable income or taxable loss. For instance, if we have pretax earnings -- like this quarter, we had pretax earnings of $1 million, but we had a taxable loss because there were loans charged off, and there were losses on sale of previously provided -- on OREO where we had previously provided valuation allowances on. So that essentially is a taxable loss. So on the surface of it, that looks like there would be no tax liability incurred. However, we are limited by how much of that taxable loss we get to use going forward.

I know that's a long answer, and it really didn't give you much. But we're trying to work through that. But I would not expect much in the way of accrued tax liability for 2011.

So it should be fairly minimal -- certainly not at statutory rates.

Yes. That's correct.

Great. Thank you.

Thank you. At this time, there are no further questions. I'd like to turn the call back over to management for any closing comments.

Thank you very much. We're encouraged by this quarter. And we're encouraged by the overall condition of the Bank. And we hope that we can continue our work in the liquidation of troubled assets area. And with that, we certainly expect all area of our operation will further improve.

Thank you very much.

Thank you.

Ladies and gentlemen, this concludes the Preferred Bank First Quarter 2011 Conference Call. If you'd like to listen to a replay of today's Conference, please dial 303-590-3030, or 1-800-406-7325, followed by pass code of 4434739.

Thank you for your participation. You may now disconnect.