Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Preferred Bank (NASDAQ:PFBC)

Q2 2010 Earnings Conference Call

July 29, 2010, 5:00 PM ET

Executives

Lasse Glassen - IR, Financial Relations Board

Li Yu - Chairman, President, CEO

Ed Czajka - EVP, CFO

Louie Couto - Executive Vice President, Acting Chief Credit Officer

Analysts

Joe Morford - RBC Capital Markets

Aaron Deer - Sandler O'Neill & Partners

Joe Gladue - B. Riley

Joe Stieven - Stieven Capital Advisors

John Deysher - Pinnacle

Don Worthington - Howe Barnes Hoefer & Arnett

Operator

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 29, 2010, and I would now like to turn the conference over to Lasse Glassen of Financial Relations Board. Please go ahead, sir.

Lasse Glassen

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 up 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?

Li 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 break even. 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 new capital. After expenses we're at more than $73 million to our equity. We are now very comfortably exceeded the capital ratio requirement that was set for onto us by our regulators. Over the long term I will tell you that our capital buffer will even grow bigger.

The next is the improvement of our credit qualities. During the second quarter non-performing loans were reduced 32% on the first quarter and also the [ORU] 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 slipped into July the improvement will be 31%.

Management has always been very focused upon the past due loans as it is early indication of our credit situation. I'm also pleased to report that as of June 30 past due loans has been reduced to $9 million from the $23 million 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, paid off mostly in this quarter.

Our next most important goal was obviously working diligently toward the goal of lifting up the consent order that 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 non-performing assets.

We are highly encouraged at this time. Thank you very much. I'm ready for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Joe Morford - RBC Capital Markets.

Joe Morford - RBC Capital Markets

I guess along those lines I’m wondering if you couldn't speak more broadly to classified trends. Directionally, are they improving as well? You've seen just much new inflow of problems, so is this pretty much just working out the known issues?

Li Yu

Well, one of the -- classified are very highly related to the past dues. They have -- it seems to be a high core relationship and one of the indications is that past due has been down, so that probably is a good indication of classifieds also coming down, which is also, in our opinion, it is.

During the second quarter, during our capital raising process, we have very extensive outside loan review. They're looking to 70% of our total credits in dollar amounts and penetrating into a substantial amount of our performing loans and good quality loans. We have implemented all of the reprimanded correction, substantially all of the recommendations they had.

But we should not to prevent from, A, new event that could happen, which we hope is very little and, B, another body coming in, take a different viewpoint [setting rules].

Joe Morford - RBC Capital Markets

Then I was just curious on the OREO sale that was recently completed this month. Was that a bulk sale of multiple properties or it was just a couple? I think in the end what was the ultimate value realized? Excuse me?

Li Yu

It was only one property.

Joe Morford - RBC Capital Markets

Only one property; and what was the …

Li Yu

I’m sorry?

Joe Morford - RBC Capital Markets

Sorry. I'm just curious what the ultimate value realized was versus kind of the initial loan balance?

Li Yu

Initial loan balance including -- our portion of the loan is roughly $20 million. There's another party (inaudible) [but] close to $10 million, so total value of the property is about $30 million. We realized about 20 -- approximately $27 million of it minus a little bit of expenses related to it.

Operator

Your next question comes from the line of Aaron Deer - Sandler O'Neill & Partners.

[Andrew] - Sandler O'Neill & Partners

This is actually Andrew on for Aaron. First question, should we be assuming a 0% tax rate given the valuation allowance and the DTA is out there?

Ed Czajka

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 0% tax rate because of the valuation allowance and the DTA. 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.

[Andrew] - Sandler O'Neill & Partners

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

Ed Czajka

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

[Andrew] - Sandler O'Neill & Partners

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

Ed Czajka

Correct.

Operator

Your next question comes from the line of Joe Gladue - B. Riley.

Joe Gladue - B. Riley

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?

Li Yu

Well, we do not believe between now and a year there will be substantial, a large amount of shrinkage on the loan side. As you can probably see, the total asset side is really depending on the substantially over-liquidity that we're having right now.

We have $160 million that was sitting in a cash account over and above the security investment we have and the lines we have with banks, with the home loan bank and so on. So possibly what we need to do is some of the broker [when the deposits] will be running off it will 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.

Joe Gladue - B. Riley

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?

Li Yu

I will be answering part of it. I'll let Ed answer some of it. Ed, why don't you start first?

((crosstalk))

Ed Czajka

Why don't I go ahead? Well, a couple things, Joe. Yes, asset yields did come down in the quarter, primarily -- we had a little bit on the loan side but then we had some on the investment security side as well.

We've been doing some repositioning of the investment portfolio. We're getting out of -- to the extent we can 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 very high-rated corporates, Ginnie Maes, etcetera, and 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 shrank 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 have 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 had $190 million in cash on the balance sheet.

Now that we don't believe -- well, 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.

Joe Gladue - B. Riley

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

Li Yu

Well, we didn't see anything that's on the funding side. The rate is going to be increasing. In fact, we foresee within the next two or three months period time the rate is going to be relatively leveled off at this point in time. So, however, the economy may change any time but right now within the horizon through the third quarter-end we don't see funding costs will change much.

Joe Gladue - B. Riley

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 … ?

Ed Czajka

Well, 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 has 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.

Operator

Your next question comes from the line of Joe Stieven - Stieven Capital Advisors.

Joe Stieven - Stieven Capital Advisors

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

Li Yu

Yes, sir.

Joe Stieven - Stieven Capital Advisors

That's already done. That's question number one. Then question number two, on a non-performing table you have, you have underneath your non-performing 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 non-performers held for sale. If that's the case, when are those scheduled to close?

Louie Couto

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

Joe Stieven - Stieven Capital Advisors

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

Louie Couto

That's correct.

Operator

Your next question comes from the line of John Deysher - Pinnacle.

John Deysher - Pinnacle

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

Ed Czajka

Well, 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 back 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.

John Deysher - Pinnacle

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

Ed Czajka

Well, 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.

John Deysher - Pinnacle

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?

Ed Czajka

Well, 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 -- the 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.

John Deysher - Pinnacle

So there should be no markdown on the portfolio as they become sold?

Ed Czajka

Correct.

John Deysher - Pinnacle

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

Ed Czajka

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

John Deysher - Pinnacle

To the extent you can. That's fine. 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?

Li Yu

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 positive, which reduce the reserve requirement of some of the retail assets.

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.

The feeling that we don't do much new loan nowadays and also that the migration into non-performing loans is almost negligent in the second quarter and improvement in the past due accounts, there is no need for us to do any provision the second quarter, which is not to say the third quarter it will be the same. A lot depends on the valuation reports we're going to receive.

John Deysher - Pinnacle

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

Li Yu

We cannot predict that, John.

Operator

Your next question comes from the line of Joe Morford - RBC Capital Markets.

Joe Morford - RBC Capital Markets

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?

Li Yu

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

Joe Morford - RBC Capital Markets

So a couple of loans you purchased, you're saying?

Li Yu

They were booked.

Operator

Your next question comes from the line of Juli Balicka - KBW.

Juli Balicka - KBW

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 non-accruals, etcetera, that's still there, what is the natural portfolio turnover in your books of the two paydowns, repayments, etcetera?

Louie Couto

Julia that's -- this is Louis speaking. Historically and in the past we would have had probably a normalized run rate that we could speak to. Certainly in the last eight to 12 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 because a we answered the question before we are noticing with a little bit of a stabilization that we are getting some more line usage in our C&I portfolio.

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 low paydowns. But I guess that's probably the best way I can answer that. Until we get more stabilization on a go-forward it would be hard for us to predict what that would be. But we certainly do not see a significant change or deterioration in earnings assets.

Juli Balicka - KBW

Right. No, no, I was kind of 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?

Li Yu

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

Ed Czajka

Julianna, maybe -- this is Ed. One thing that we found that was very interesting over the course of '05, '06, '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 is not all that granular. 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.

Then you would have other credits that would renew with us. 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.

Juli Balicka - KBW

Approaching this from the other side, what were the new loan originations in this quarter?

Li Yu

Louie, do you have numbers?

Louie Couto

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.

Juli Balicka - KBW

AT what price are you offering new C&I loans?

Louie Couto

Again, it depends on the credit quality of the customer, the deposit relationship and pricing is always a very, again, complicated matter when you're trying to look at overall profitability. Generally we're maintaining a floor rate. 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.

Juli Balicka - KBW

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

Li Yu

Well, put it this way. We probably seldomly would do a floor rate less than five -- but probably would -- it's very hard for us to get a floor rate over seven at this point in the marketplace. As far as between that particular range, it depends on what kind of deposits we're getting.

Juli Balicka - KBW

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 CDARs, brokered California deposits, deposits from other banks, the whole gamut of non-relationship deposits? I know some of the jumbos are relationship deposits, so I was going for the -- not trying to exclude those, but just the others.

Ed Czajka

Julianna, first off, we consider the CDARs deposits as relationship deposits because they may not be the actual dollars but they do represent relationship deposits. On that front we're actually having some success. 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 brokers money as well as some deposits gathered via internet posting services.

Operator

Your next question comes from the line of Don Worthington - Howe Barnes Hoefer & Arnett.

Don Worthington - Howe Barnes Hoefer & Arnett

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.

Ed Czajka

Yes, Don. It's directly attributed to it. We had it in 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.

Don Worthington - Howe Barnes Hoefer & Arnett

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?

Ed Czajka

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, etcetera, etcetera, all of these things have contributed to the increase in that line item.

Operator

Thank you. 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.

Li Yu

Well, thank you very much for attending our 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. Until then I'd like to say thank you everyone. Bye-bye.

Operator

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 pleased 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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts