Jul 31, 2009
Operator
Good afternoon ladies and gentlemen, thank you for standing by. And welcome to the Preferred Bank's Second Quarter 2009 Earnings Conference Call.
During today's presentation, all parties will be in a listen-only mode. And following the presentation the conference will be opened for questions.
(Operator Instructions). This conference is being recorded today, Thursday July 30th of 2009.
I will now like to turn the over to Lasse Glassen with the Financial Relations Board. Please go ahead sir.
Lasse Glassen
Thank you, good day everyone and thanks for joining us to the Preferred Bank's results for the second quarter ended of June 30, 2009. With us today from Management are Mr.
Li Yu, President and Chief Executive Officer and Ed Czajka, Chief Financial Officer. Ed then will provide a brief summary of the quarter and then we'll 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 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 materializes or any of these assumptions prove incorrect, Preferred Bank's results could differ materially from its expectations as set forth in these statements, while bank 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?
Li Yu
Thank you very much, Lasse. Good afternoon.
Our bank reported loss in the second quarter of 2009. The loss was principally due to an oversized provision for loan losses.
A continuing writing down of the OREO assets continuing to write-down although in a much smaller scale, the securities and also the special assessment by FDIC in a amount of $600,000. But, I do like to report it is my personal opinion, I finally see a small ray of sunshine on the housing side of our business.
About a month ago, I was talking to a group of visiting investors. I told them that I think many of the area in L.A.
had seen the housing prices firmed up and activity picked up. About when, I was directing this press release two weeks ago, I put on my belief on the paper.
And yesterday and day before yesterday, many reports including the page color and the most importantly the California Realtors Association report that reports the general activities of confront my feelings. This is not to say going forward.
We would not be receiving additional disappointing appraisal valuations. All of the bankers, all the brokerage communities, all the realtors and all the builders, all know that today that our professionals seems to be overreacting.
But, being that our total construction loan on for sale housing side and related land is continually decreasing. We hope going forward the further revaluation would not be as severe.
We now put much of our attention on the commercial real estate side, where we have a $300 million portfolio. The higher exposure items are $80 million in retail properties, $50 million in office properties, roughly $53 million in industrial properties and roughly $30 million in hospitality properties.
And as these items are very much employment related, we are constantly paying much attention to it. But, there are two litigation things that I can offer.
One is that, we... our origination of these loans are average below, just below 60% LPV at the origination time.
And then our average property loan size is relatively small. Deutsche Bank just released a study of the commercial real estate and it is not pretty.
But, one of their conclusions is that the smaller real estates will do much better than the lager size real estates. Having reported all that, we do have something more pleasant to say that our capital ratio is now up to 9.6%.
We have been actively managing our balance sheet in the past. Even with the losses or the losses, all the losses we've taken, our capital ratio actually increased.
Our Board... our Board still authorized a rights offering for $10 million to $11 million.
With a very attractive price, we believe that the offering will be reasonably successful. And I do hope at the end of third quarter, we'll be reporting capital ratio in excess of 10%.
Now, thank for your attention. I'd like to answer all the questions you have.
Operator
Thank you, sir. Ladies and gentlemen at this time we will begin the question and answer session.
[Operator Instructions. And our first question comes from the line of Joe Morford with RBC Capital Markets.
Please go ahead.
Joe Morford
Good afternoon Li, how are you doing?
Li Yu
Hey, Joe.
Joe Morford
Couple of questions. I guess first was I guess, curious why $10 million, what's kind of magic about that size of the offering and also looking ay back your capital rations have improved?
Li Yu
Well, actually that we have done all kinds of stress tests, including the G19 test. And none of the tests indicated we need any capital at all.
But, we in the early spring, we just feel it's a good idea to raise a little bit of capital. And so, with that decision we're going through all the words.
For some reason, our offering needs to be approved by the State of California. So, documents were sitting in their office for the good about over one month's period of time.
I mean, we have to prepare the document for their review too. So, all of this takes a whole range of time and then they really start to just continue to do it even with the capital ratio increases.
And besides what's decided, because since we don't need that much, why dilute our current shareholders that much, as we are offering the prices.
Joe Morford
All right, okay. And then the second question was just regarding the credit quality.
The total non-performing asset level remained relatively stable. You had a big increase in charge-offs and I was just kind of curious, if you could talk about some of the inflows and outflows this quarter and was it primarily downward migration of kind of previously identified problems or you continue to see new inflows and to be kind of classify the assets?
Li Yu
Actually, that much of the inflows about the assets for the second quarter was the result of migration of the delinquents, delinquent meaning to 30 to 89 days, delinquents into the current quarter. In this quarter, as of June 30th, as we do have a large delinquent numbers and I think I put on the paper that roughly 30 to 55% migration factor still pretty good.
Now, one of the situations is that out of the total delinquent number, roughly $76 million of delinquents are real estate loans. And out of $76 million, more than 83% we have very, very, very current appraisal of valuation on.
And we've make appropriate reserves on the ones that's needed to have. The remaining our loans that we think provide enough margin, and it is currently in the order of appraisal stages.
And it will be some delinquents that will be moving into the third quarter, but the entire bank is hoping and we make it our goal to reduce the total level of NPAs in the third quarter and reduce the total level of delinquents in the third quarter as compared to the second quarter.
Joe Morford
Okay. Great thanks so much Li.
Li Yu
Thank you.
Operator
Thank you. And our next question is from the line of Joe Gladue with B.
Riley. Please go ahead
Joe Gladue
Yeah, thanks. Wanted to ask some questions about the, I guess the CDOs that you had some charges on this quarter.
Just wondering how much have they been written down from their original value and what sort of transfer there is for CDOs?
Edward Czajka
Hi, Joe. This is Ed.
Par value on the four CDOs, right now is about 7.9 million, current book value is about 6.3 million and all four of these were original A pieces. So, these was kind of the low tranche of the entire structure.
Joe Gladue
Okay, let's see. Just curious on the, you mentioned that the 30 to 89 day delinquencies, a lot of more real estate related, could you just give us a little more color on what types of properties those are, just the larger one?
Li Yu
Yeah, we do have... I just know the capital situation.
Out of this group of loans, out this group of real estate loans, roughly about $43 million are land loans.
Joe Gladue
Okay.
Edward Czajka
And then roughly $24 million are construction loans and the remaining is CIEs. Okay, these are three categories that make up the three, total $76 million.
The remaining came in down plus is CMI loan, CMI loans.
Joe Gladue
Okay. All right.
All I had for now, thanks.
Edward Czajka
Thank you.
Li Yu
Thanks, Joe.
Operator
Thank you. And our next question is from the line of Julianna Balicka with KBW.
Please go ahead.
Julianna Balicka
Good afternoon. Can you hear me?
Li Yu
Yes. We can hear you.
Julianna Balicka
Hi, how are you?
Li Yu
Fine. How are you?
Julianna Balicka
Good, very good. Good to talk to you again.
Can you give us a little bit more color on the moving parts in the allowance, specifically a little bit more color on any changes to FAS 5 methodology and such?
Li Yu
Okay, I can tell you, but I'll let have Ed say that, because he is the one, actually who did the calculation again.
Edward Czajka
Hi, Julianna.
Julianna Balicka
Hi.
Edward Czajka
We'll try not to speak.
Julianna Balicka
Okay.
Edward Czajka
Actually, there were a couple of changes. We've made sort of a structural change to on the past five reserves, if we historically look back, and we've always used a seven years look back period, but we've changed the waiting in terms of how we look back at those seven years.
So, the first couple of years are much more heavily weighted than the last say three years are much more lightly weighted. So, that added to our reserves.
The other thing we did is we increased our allowance, our FAS 5 reserve on, classified loans that are not technically impaired loans, which is something we have not done in the past and both of those changes probably resulted in an increase of about 800 to $900,000 on the past loans.
Julianna Balicka
Okay. And then can you give us a sense of how much is the weighting in last three years versus what it is now versus what it was before?
Li Yu
The first three years will be 60%, last three years will be 30%. Before the last three years of 40%, the first three years about 50%.
In its first year, it could be more.
Julianna Balicka
Right, okay, very good. And in terms of the rights offering that you briefly touched upon in the beginning, when you first announced that you had told us a little bit about the commitment for management in your press release.
Can you give us a sense of how much has been subscribed or anything like that?
Li Yu
Subscription has not come in yet. We just send it out and being that out form require people rights to check to indicating there are subscriptions along with the subscription report.
I suspect the most of the subscription will be coming in the last two weeks of our offering periods, okay? So, we haven't got anything yet.
And frankly speaking, if you're holding the, situating in street names, you would not have received the paperwork yet. So, we do that, but the next thing is the management commitment, management, the Board of Directors together has committed $3 million.
Additional Board members that will resign, just resign in the summer time, would see a large shareholder committed $0.5 million. And our officer group, any including some would be as low as, some above new officer, including even one teller that committed or they indicated their commitment of about $700,000.
Julianna Balicka
Very good. Thank you very much, I'll step back now.
Li Yu
Okay.
Operator
Thank you. And our next question is from the line of Don Worthington with Howe, Barnes, Hoefer & Arnett.
Please go ahead.
Donald Worthington
Well, good afternoon, Li and Ed.
Li Yu
Hey, Don.
Edward Czajka
Hi, Don.
Donald Worthington
Just a couple of things. In terms of the REO were there any dispositions in the quarter?
Li Yu
We have about $10 million disposition in the last quarter. I think, maybe over 10.
I don't have the exact number.
Donald Worthington
Okay. Good.
And then in terms of any regulatory exam coming up, I know you add one completed couple of years ago.
Li Yu
We are expecting based on our own estimation, some quarry in the later quarter or in the first quarter that wherever we see business from our regulators.
Donald Worthington
Okay. And then I guess lastly any color on what you expect the margin to do.
You had some good expansion this quarter kind of what you see that going?
Li Yu
I don't want to take you to current price. Ed, why don't you just say what you believe in, I'll say what I believe in.
Edward Czajka
You set me up. Well, yeah we did have some good expansion in the quarter, 288 to 333 on a linked quarter basis.
Certainly, almost all that was due to really two things, lowering the cost of funds as CDs are maturing that were originated last year, they're rolling over obviously at much more rates. And then of course, the inflow of new non-accrual loans and the accrued interest that's attached to those that we have to reverse out.
Both of those were down from the first quarter which was positive. I would say going forward, in Q3 excluding any new non-accrual inflows, I'd say we probably have margin expansions to the extent of about 10 basis points.
Possibly a little bit more with regard to --
Li Yu
Well, actually, the 10 basis points, I would agree with. But there's a one more factor in improving the rather sharp increase in the second quarter is margin.
It is because that our level of our cash equivalent been greatly reduced. And this cash equivalent is earning us, generally speaking is average 1%.
So mathematical, there are mathematically that has improved our --
Edward Czajka
Net interest margins.
Donald Worthington
Okay. Great.
Thank you very much.
Operator
Thank you. Our next question comes is from the line of Aaron Deer with Sandler O'Neill Asset Management.
Please go ahead.
Aaron Deer
Hey, guys.
Edward Czajka
Hi.
Li Yu
Hey, Aaron.
Aaron Deer
Most of my questions have been answered, but just couple. The deferred tax assets, can you talk about that in terms of what your accounts are saying in terms of sustainability of that?
There has been a number of banks if I had to write those down, I m just wondering what your thoughts are on that?
Edward Czajka
Yeah hi, Aaron. This is Ed.
Yeah, I saw a rather large one today, earlier today. But, one of the first things we did going into sort of the quarter end process, was to sit down with KPMG and in talk specifically about the deferred tax asset and where we stand relative to a potential valuation allowance that we need to be assigned to that.
We looked through the numbers. Obviously, I believe we've stated its look forward to federal look back, I could have those wrong.
But, we looked through the numbers, where we were two years ago in terms of earnings, where we could be two years from now in terms of earnings and where we're at currently in terms losses we've had of last few quarters. And we all came to the conclusion that no valuation allowance was required for Q2.
Depending on what happens in Q3, if it's something similar to Q2, I am obviously, not going to speculate on what the number is going to be in Q3. But, it's my personal belief that we won't have a valuation allowance issue in 2009.
Aaron Deer
Okay. That's helpful thank you.
And then, what percentage of the non-performers are participations?
Li Yu
Up to 28.7%.
Edward Czajka
Real-estate, solely real-estate, participations we've put in.
Li Yu
Okay, we've purchased on participation for 28% of the real estate, 28% of participations.
Aaron Deer
Okay. Great, thanks guys.
Li Yu
Thank you, Aaron.
Operator
Thank you. Our next question is from the line of Chris Stulpin with D.A.
Davidson & Company. Please go ahead.
Chris Stulpin
Hi, thanks for taking my phone call. Joe asked, one of my questions was answered.
Just the last question I have is regarding deposit growth expectations going forward, after a linked quarter they decreased.
Li Yu
Well Chris, decreased quarterly base is really because we have a long decrease. And we have decided that we're managing this bank basically speaking in this part of cycle, more so basically on preserving the capital.
So, that is number one important thing. And consequently, our deposit has decreased.
But, if you looked at the decreases deposits, all the deposit decreases are coming from the TCDs, which means that all... none interest bearing DDAs stays the same, so, therefore, the percentages increase a lot.
We like to believe when we decide to add on the loans that we can go out and get the TCDs quite easily, because some of them are enough. We have to say that we believe we're the lowest paid among our peer group.
Chris Stulpin
Okay, makes sense. Thanks.
That's all I have. I appreciate it.
Li Yu
Thank you.
Operator
Thank you. Our next question is a follow-up question from the line of Joe Gladue with B.
Riley. Please go ahead.
Joe Gladue
Hello. I am just going to ask the other side of Chris's question there.
You know on loan demand and your expectations for loan growth for the reminder for the year?
Li Yu
No. Okay.
We actually do not expect loan growth for the remainder years. That's basically on the same basis because when I said expect, I don't see the economy has pick up to the level that we want to increase from the current level of the loans.
This is also partially because that we see a good portion of our construction loan for housing will be paid off during the next six to 12 months period time. Depends on how the market absorption is.
And we'll also see that a portion of our non-performing loans and our OREO will be liquidated in next six months period time. So, we have a rather large assets reduction.
We will replace them with some of the loans. And available are not abundantly, but they're available in varied qualities.
We're still doing it, but we're doing it and it's not very carefully right now.
Joe Gladue
All right. Thank you.
That's it.
Operator
Thank you. (Operator Instructions).
And your next question is from the line of John E. Deysher with Pinnacle Value Fund.
Please go ahead.
John Deysher
Good afternoon.
Li Yu
Hi.
John Deysher
A couple of quick questions. One, is there any update on the TARP status?
Li Yu
As a matter of fact that we don't have any update at this point in time.
John Deysher
I mean it's been with them for a several months now, I believe.
Li Yu
Yes, yes.
John Deysher
So, no response at all?
Li Yu
I don't think that... anyway, I don't want to speculate anything.
John Deysher
Okay, are these --
Li Yu
I want to say John, I mean as I indicated to you previously, we think we have more than enough capital.
John Deysher
Yeah. Okay.
That's fair. The FDIC special charge 617,000, was that a charge that was assessed to all banks or what's the nature of that specific charge?
I guess was it unique to Preferred Bank or was this a charge that was --
Li Yu
No, it's to all banks.
Edward Czajka
Hi John, this is Ed.
John Deysher
Hey, Ed.
Edward Czajka
Yeah, that's for all banks. The FDIC imposed a special one-time assessment to be paid out on September 30th we had to accrue for at June 30th because we knew we can reasonably estimate the dollar amount.
And it's, the formula is basically total assets minus Tier 1 capital and 5 basis points on that sum.
John Deysher
Okay and that's applied to all FDIC insured banks?
Edward Czajka
Yes.
John Deysher
Okay. The property for sale, there is a one partial, I think that had the contractors sell $12 million or so, 12.2 million Westchester, California.
When is that anticipated closing?
Li Yu
Sometime in August.
John Deysher
August.
Li Yu
Mid-August.
John Deysher
Mid-August, and that's cash deal?
Li Yu
That's no, that's a partial cash, partly finance, finance deal.
John Deysher
What percentage of it will be cash?
Li Yu
About 20-25%.
John Deysher
20% cash and the rest will be refinanced by Preferred Bank?
Li Yu
Yes.
John Deysher
Okay. Got it, and in the commercial real estate portfolio, I think it's about 300 million.
And you indicated there were four types of categories, retail office, industrial hospitality. Those add up to about 210.
I'm just curious, what is the other 90 million, what type of commercial real estate is --
Li Yu
But, the other 90 million done, including we have some medical office buildings which is, we consider with something most stable properties right now. And we have mortgaged on several very, very successful profit making hospitals.
And we have the special assets of financing to such as 24 optima center, I mean mobile home park et cetera, et cetera.
John Deysher
Okay. And I think that release, the loan to value ratio based on origination values is about 58%, what would the loan value ratio be using current values or appraise values?
Li Yu
That, first of all, not everything is currently revalued right now and we cannot speculate what the current value is. I think each property is different.
There is no possibility how much value reduction is.
John Deysher
Okay. For recent appraisals what would kind of --
Li Yu
Some appraisals are coming down, I mean some appraisals, I was told, some appraisals come down properties. I mean 30%, year-by-year reduction.
Somethings only shows 5 to 10%, it's kind of over the place.
John Deysher
Okay. What percentage of that portfolio has been appraised within the last six months, let's say?
Li Yu
We cannot say that. We can only go back to research that and get back to you.
John Deysher
Okay. All right.
That might be helpful to know. I guess the final question is on the rights offering.
Ed, correct me if I'm on base here, but those shares not be registered, but they are required to be to be registered, they're going to be freely tradable, is that right?
Edward Czajka
Yes.
John Deysher
Okay. So, there is no problem with trading the shares post offering?
Edward Czajka
Yes. That's good.
John Deysher
Okay. Very good.
Thank you.
Operator
Thank you. Our next question is a follow-up question from the line of Julianna Balicka with KBW.
Please go ahead.
Julianna Balicka
Good afternoon.
Li Yu
Hi.
Julianna Balicka
Hi. I just had a couple of follow-up questions.
A little bit to going back to Joe's point about the loan growth, when you start to discuss the decreases, do you have a sense of how much you are going or can you quantify how much of the construction portfolio you are expecting to run off, and can you quantify what level of non-performers you're looking to dispose off next quarter?
Li Yu
I don't think I can necessarily quantify that in the one quarter.
Julianna Balicka
I think two quarters.
Li Yu
Yeah, you take two quarters, but I think that within two quarter constructional pay-off will be about in a 50 to $70 million range. And I think in the non-performing assets, well Julianna just really need everybody's help including the economy and state.
We hope we can give it about 80 to $100 million value the assets.
Julianna Balicka
Very good and then a follow-up question on the reserve that you have right now, the 30 million, 30.6 million, refresh our memory, how much of that is specific versus FAS 5?
Li Yu
You had the number, right.
Edward Czajka
Julianna, about 12 million is FAS 5 and that would make the other roughly 18, is about 114 specific reserves.
Julianna Balicka
And do you anticipate you're having to switch to more drastic charge-offs of specific reserves kind of what we're seeing from other banks this quarter?
Edward Czajka
Please you repeat the question?
Julianna Balicka
Yeah, sorry. Do you anticipate that you might need to start switching to charging off specific reserves instead of carrying them the way some other banks have been forced to kind of.
Li Yu
no, we charge-off, if you know that charged off $18 million this quarter. We charged all along in this quarter.
Julianna Balicka
Right, never mind, I don't think I'm phrasing my question correctly.
Li Yu
And some of the other things --
Julianna Balicka
Let me follow-up offline. I do apologize.
Li Yu
Yeah. Related to the specific reserve, as they go along, as they prove they're more than a reserve and they will be, in other words...
the value is totally collateral dependant and looks like a permanent type of situation, we tried to sum up.
Julianna Balicka
Right, I'm sorry it's my fault. I will follow-up.
Operator
Thank you. And there are no further questions in the queue at this time.
I would like to turn the conference back to management for any closing remarks.
Li Yu
I'm going to deliver this one, because I've think anticipating one question, I haven't got all this time. Can I ask myself and answer myself again.
The question is that so further you guys have $107 million land loan. How much of that is I mean non-performing in that?
Well. The answer is that 27 million out of the $107 million currently is non-performing.
And the remaining and another $43 million of currently delinquent, with everyone 40 valued and based on the most recent appraisal. And then, we look at the remaining about $30 million loan I would still feel fairly good about it.
So, this is a nature of our land loan portfolio I must say. Now, on the construction loan, housing construction loan portfolio, about a $141 million we have on hand, $37 million is currently non-performing and obviously, fully reserved when needed, okay.
And another $24 million is currently in delinquent status and several other was significant reserves being taken on that, okay. And the and the remaining $80 million or so, we still feel pretty good about it, okay.
So this is status about where we would look into our current loan portfolio relating to housing inventories, housing loan portfolios. Thank you very much.
And we appreciate your attention and hope we have better things to report next quarter.
Operator
Thank you. Ladies and gentlemen this concludes the Preferred Bank's second quarter 2009 results conference call.
If you would like to listen to the reply of today's conference please dial 303-590-3030 or 800-406-7328 and enter access code 4121538 followed by the pound sign. We thank you for your participation.
You may now disconnect.