Preferred Bank (PFBC) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Preferred Bank First Quarter 2008 Conference Call. During today's presentation, all parties will be in a listen-only mode, and following the presentation the conference will be open for questions. (Operator Instructions.) This conference is being recorded today, April 24, 2008. I would now like to turn the conference over to Lasse Glassen, Financial Relations Board. Please go ahead.

Thank you. Good day, everyone, and thanks for joining us to discuss Preferred Bank's results for the first quarter ended March 31, 2008. With us today from management are Mr. Li Yu, Chairman, President and Chief Executive Officer; Bob Kosof, Chief Credit Officer; and Ed Czajka, Chief Financial 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 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 documents the company files with the Federal Deposit Insurance Corporation, or FDIC.

If any of these uncertainties materializes or any of these assumptions proves 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 very much, Lasse. Good afternoon, ladies and gentlemen. The first quarter 2008 is really a challenging quarter for us. Our profit was down to $0.34 a share, which is a big decease from the fourth quarter of last year and the first quarter of last year. The reasons are, as I stated in the press release, that a large loan loss provision as a result related to the depressed housing market. And the next factor is the, between December and March 30--March, there has been 225 basis points rate reduction by the Federal Reserve. And with our asset-sensitive balance sheet, most of these factors showing up in the immediate (inaudible) quarter. And also the increased level of non-performing loans has reduced the new interest income somewhat.

Now, at this point in time, I personally see no light at the end of the tunnel of the real estate marketplace. Going forward, values may indeed further reduce. Although it is our position that the price reduction may have moderated somewhat, the main problem that exists in the marketplace is the buyer's inability to obtain a mortgage in a short period of time. So that resulted in a lot of projects being, having higher carrying costs.

On the rate side, and we believe that going forward, further rate cuts will be at least infrequent and less significant. So we're looking forward that, that interest margin to stabilize within the near future.

We will, obviously, approach our bills very cautiously and make sure at all times that our capital level will stay as well capitalized in all definitions. At March 31, our capital ratio, final capital ratio, is 9.8%-plus.

On the business side, with loans, the average loan for the first quarter showed a slight increase from the first quarter of 2007. And on the deposit side, average deposits increased roughly $450 million from the fourth quarter, which is almost 4%. And on that, we were surprised with that, because ever today, we are not really very competitive in our marketplace. And also we live in a tight market. We are also seeing many deposit outflow out of the country to Europe or to Far East as people believe that currencies out there will further appreciate. So on that count, we have been feeling fairly good about that.

And with that, I'd like to turn it over to your questions.

Thank you. (Operator Instructions.) Our first question comes from the line of Joe Morford with RBC Capital. Please go ahead.

Thanks. Good afternoon, Li.

Hi, Joe.

I guess the first question would just be on the credit. Could you talk a little bit about the inflows and any outflows (inaudible) that were in the quarter. Just kind of the movement there?

On the (inaudible) side, that really the provisions are really related to the three loans, same three loans that we mentioned as of December 31 being seriously impaired. The collateral value has further reduced on these three loans, and out of the total loan provision, that majority of the loan loss provisions are related to these loans, of which two of them is a land or reconstruction loan, and one of them is a C&I loan. We have great hope that we'll have a reasonable recovery on the C&I loan, but we'd rather reserve as much as we can at this point in time since the recovery is a future effort.

On the other area, we don't see too many loans going to the impairment stage, although a couple of loans have turned from a performing state to non-performing. Simply the project borrower has found their project's closed, but the sales have been slow. They've run up an interest reserve that we have to put into a non-performing status. Most of these projects still have value much higher than the loan amount, and we're looking forward hopefully that, to recover the interest when and if they sold all the units.

And specifically, it looks like there was a new commercial real estate loan and a new construction loan that went into non-accrual. Any color on what, what is it?

There is one loan that is the same, one of three loans that we cited was impaired on December 31.

Oh, okay, yes.

That went from a substandard level to a non-accrual state.

Yes, okay.

I'm thinking that's the majority of that. There's two later loans. One of them is $1.5 million, okay? And the other one is, I think it's $3 million went into the non-performing stage.

Okay. And it sounds like, then, if the provision is related mostly to the existing issues, that there's just in terms of classified levels and like migration of new problems, there was just not much of that in the quarter? Is that fair to say?

Well, we have also increased the fact of the general reserve, even the specific reserve we're talking about. We also increased the general reserve, and we're recognizing certain factors have changed. So yes, it is mostly related to this (inaudible) situation. New loans that's migrated into the so-called, the trouble area, is relatively insignificant, both in dollar amount and the number of that, number of loans.

Okay. And then lastly, just a question on capital and the dividend. At period end, as you cited, your capital ratios are relatively strong and certainly well above the well capitalized levels, yet you chose to cut the dividend back. What's your general thought on the capital levels, and are you exploring actually raising some different types of capital at this point?

We have (inaudible) representing the counterpart of several of your firms that was in the conference call tonight has came in and run analysis for us. And at the worst-case scenario that we assume, we will be staying ahead of 9% of our leveraged capital ratio, even on the worst-case scenario. So the conclusion is that they don't need to raise funds, they don't need to raise any kind of capital for us.

Okay.

So we're pretty comfortable with capital ratio and so on, but however, in a prudent move and because we want to be consistent, our Board wants to be consistent in the dividend payouts in relation to the earnings, so therefore we reduced the dividends this quarter.

Okay. Fair enough. Thanks so much, Li.

Thank you.

(Operator Instructions.) Our next question is from the line of Aaron Deer with Sandler and O'Neill. Please go ahead.

Hi, guys. This is actually Andrew on for Aaron. How are you today?

How are you?

Good, thanks. Just a question on growth in the commercial real estate portfolio, just like what sort of types are they and location, and what sort of yields are you getting? And maybe if they're fixed or floating?

Well, basically, that the most of the commercial real estate is diversified in different natures. There are hotels, there are apartments. The largest increase, probably, apartment loans, and then the retail properties, and these are the majority of things, coupled with industrial properties. And the rate, generally we're still doing the loan in the rate of, in the prime-related or LIBOR-based rate situation. But there are several loans were doing in a fixed-rate basis. And the year to date is, frankly speaking, better than the year that we used to get.

Okay, great. And then, I guess on construction. Have you guys stopped originating new loans in construction?

We have not stopped in there, but we have not seen anything that make us to be very excited about doing that. The net result is that we do have a reduction of our housing construction loans, but not significant enough because the payoff is nothing big enough. In the meantime, some of the old construction loans are still not completed, has to be continued to fund the loan.

Okay.

So there is net reductions.

Great. All right. No further questions. Thank you.

Thank you.

Thank you. Our next question is from the line of Juliana [Balica] with CDW. Please go ahead.

Great. Hello, how are you?

Hi, how are you doing?

I was just kind of asking a little bit more, general outlook/trend questions in terms of going forward through the reserves. Your reserve level has increased nicely to 162, but if we make a fairly bearish assumption that the market continues to deteriorate at the current pace, do you think that your current level of reserving is fairly proactive, pre-emptive, or will you continue to be increasing your reserves along with market deterioration?

Li Yu; Juliana, there's two ways I can answer this question properly. I probably have to two piece two questions together to get the answer you want to have, okay?

Okay.

Number one, we are very proactive in our looking at our reserve. We don't have that many construction lenders in our entire bank. The number of the loans is a small number. So, for instance, we will have a weekly or biweekly total housekeeping in going over every loan we have. When we have weaknesses, we like to identify them, and we like to provide reserves.

But when we're providing the reserves, we have to, we have to measure them based on FASB Rule 14, which is whether there is any impairment on that, okay? And luckily, many of the projects we're having, we're still showing a comfortable margin between the newly appraised value--reappraised value of these projects--and usually they're appraised in February or March, and some of them even early April. We're doing that. Newly appraised values still comfortably higher than the loan dollar amount, okay? But when and if we identify some projects maybe facing with some problems, we immediately put a reserve on it.

Now going forward, looking forward to the situation, my job is really to prepare for the worst. And I cannot be sitting here and saying that, hoping that the market will suddenly level off and therefore no more further problem in the whole situation. And I have to assume it looks like the market is going to go down further. Likely there will be additional loan losses or further deterioration of the collateral value of our already failed loans.

When, if that's in sync, it is our job, and it is also that required to immediate recognize that and take into reserve.

Right. Makes sense. And then, in terms off the appraisals that you were doing on your portfolio, what kind of reappraisals, what level of downward values are you seeing on them, particularly the April ones?

April ones, you see--I, for the months have, since we've seen the March and April, seems to be the appraisal value has been, appraised value has been not too much different than the early amount. It's a small, small decrease. It's not a big decrease. So that's why I commented earlier from our observation, it seems to be moderated. The speed of price reduction is somewhat moderated. And personally, there is no scientific proof on this whole situation. There's no data to prove the situation.

Personally, I did go out and talk to different various informed people, including several bankers that are friendly, and we discussed it. And it seems to be generally with here, the price is not that bad in terms of a reduction in price. But it is the mortgage unavailability.

Let me pose you a situation most recently. We have a customer has nine units in an account in escrow, but at the last minute they were told by one of the lending banks they have new rules that require to have 90% of all the units to be in escrow before they close anything. That is, I still remember in 1982 or 1983, that was, the requirement was 70% and it was already causing bloodbaths all over the place, and this is 90% right now. So immediately, the borrower had switch it to another lender, starting from ground zero and up. And unless this mortgage situation is going to be improved, and I think the, in the housing market will continue to have further depression. Hopefully, not big in price.

Right. Okay. That makes sense. All right. I'll step back down. Thank you very much.

Thank you.

Thank you. Our next question is from the line of Don Worthington with Howe Barnes Hoefer Arnett. Please go ahead, sir.

Good afternoon, Li.

Hi, Don.

A couple of things. One, give an update on that OREO project in Oakland?

Yes. We are actively pursuing, as I've stated earlier, to develop the lower part of it, which is the majority of the value here, to increase the density from 38 units currently to 105 units. And based on the people that we, the professional we engaged in and also the land use attorney, such zone changes will be, we should be cautiously optimistic about getting it closer to the third or fourth quarter.

Okay.

And, but afterwards, there will be entitlement process. We fear that when the entitlement process started and one is to the, one is (inaudible), that would be the time to market the property. Before, there will be, the value will be much lower. And if we do it later on, and I think by that time our hope is that the entire real estate market is better, so the whole thing will be easier mark to market and better value. And to this date, we don't see value reduced from our loan level yet.

Okay, great. And then, you have quantified the impact on the margin of the non-accrual loans. In other words, how much of the 71 basis points is attributable to the reversal of interest?

Ed's got the number right at his fingertips.

Okay.

Hi, Don.

Hi, Ed.

The impact of the reversal on non-accrual interest for the first quarter was 12 basis points of the overall margin compression.

Okay, great. Thank you. And then I guess my last question, was there any repurchases in the quarter that caused the share count to drop?

There has been in the early months. In January and February we purchased back some stock, okay? And then I don't think we've executed any purchases ever since mid-February.

And do you have the number for how much was repurchased in the quarter?

Do you have it, Ed?

(Inaudible - multiple speakers)

As long as the question is anticipated. I've got everything else here in front of me, Don. I think it was around 200,000 shares.

Okay. Great. Thank you.

Thank you. (Operator Instructions.) It seems we have no further audio questions (inaudible).

Well, thank you very much for your attention, for your interest. And if there are any further developments on any of the subjects we talked about in this press release, we certainly will be, bring it up to your attention immediately. Thank you very much.