Preferred Bank (PFBC) 2009 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Preferred Bank first quarter 2009 conference call. During today's presentation, all parties 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, Friday, April 17th of 2009. I would now like to turn the conference over to Lasse Glassen with Financial Relations Board. Please go ahead.

Thank you, good day, everyone. Thanks for joining us to discuss Preferred Bank's results for the first quarter ended March 31st, 2009. With us today from management are Mr. Li Yu, Chairman, President and chief 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 will 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 the 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 may 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 would now like to turn the call over to Mr. Li Yu. Mr. Yu?

Thank you, Lasse. Good afternoon, ladies and gentlemen. Thank you for attending the Preferred Bank's earnings conference call. For the first quarter of 2009, we reporting a small $0.03 net income from operations. And although the number is small but we are somewhat relieved that the number shows a positive site in the results.

More importantly, when I wrote the press release, it was about last Friday or Monday. And we were seeing certain several reports from the public including [Case Shiller] was saying several markets of the area has firmed up in terms of median price was concerned. And it was just yesterday we have received information from Los Angeles Times, MSNBC, I mean CNBC, all those publications has showed that most of the area if not all, even including the Riverside County and Ventura County has show the median price is stabilizing. Which is certainly a good news for us and also that -- on the lower price area that the mortgage is become more available today than before.

And we're certainly that we're hopefully that the speed of mortgage renting will be improving in our future, in future quarters. Because, it is very important to us as most of our customers that was in the housing side, developers, which they have condo projects or home development projects which we really rely on the mortgage being available. And the mortgage being available on the -- on the timely basis, surely a more efficient basis. And having said that, we put most of the things that I want to say in our press release.

We're hoping that -- we're disappointed with the first quarter of the increase in MPLs -- MPAs, but that was largely the results of events first quarter that carry over to the first and second months of the quarter. And we're seeing the migration situation improving in March. And it will certainly hope that carry over to April and so on. And we're actually anticipating that hopefully next -- second quarter, we have more reduction or liquidation of the assets or problem loans as compared to previous quarters. And we hope we should have a net improvement in the second quarter of 2009.

Now, having said all of that, and I would like to preserve all of the time for your questions.

Thank you. Ladies and gentlemen, we will begin the question-and-answer session at this time. (Operator Instructions). One moment please for our first question. Our first question comes from the line of Joe Morford with RBC Capital Markets. Please go ahead.

Hi, good afternoon, Li.

Hi, Joe.

Wondered if you could, I guess to start off, talk a little bit about the inflows of new problem loans that you did see in the quarter? It looked like the bulk of them, the increase came in resi, construction and commercial land and just give us a little more details on what those were.

The inflows are really, the one figure that I on a daily basis watch the most is 30 to 89 days. The inflow in the first quarter basically to the MPL segment is basically the 30 to 89 days in the fourth quarter that was happening over there. And largely is a couple of land loans and a couple construction loans and that was go into nonperforming category during the first quarter. And that reaches the magic 90 days limitation that took place in our nonaccrual. I believed in the fourth quarter press release, I indicated at the time that roughly 40% of the loan would be resolved. And in the first quarter, roughly about that number holds about 40% resolved, actually about 50% resolved. The remaining 50% has flowed into -- flow into nonaccrual category.

And based on the actual situation, as of March 31st, the situation improves. I think the early situation is that roughly 70% of the number of the March 31st, 30 to 89 days would be resolved -- will be resolved. And we're hopeful that another 10% to 15% will also be resolved in the quarter. The only one item we think is more sure or more possible than -- more probable than not is roughly a $5 million loan that will be heading to the nonaccrual category.

So, the importance of 30 to 89 days to me is because that's when the first time the weakness is as strong that we're busy immediately evaluating these kind of loans and then taking the appropriate reserve that's needed for these loans.

Do you have loans that are 90 days past due and still accruing or are all of those just in nonperforming loans?

We don't have anything 90 days still accruing. We try to -- there are some loans, admittedly, the loan to value ratio is really low, that we can still accrue the interest, but we're not practicing that at this moment. Whenever it is past 90 days, we just reverse the interest that accrued in the past 90 days and put it in nonaccrual.

Okay. Then a question on the OREO balance, you had a couple land properties out in Beaumont. And I was just curious when the most recent appraisals were done for those and how does that compare to original appraisal when the loan was made?

The appraisal was done -- it was done on December 30th, 2008. So, it is barely one quarter old. And that represents probably the bottom price because in January and February, we have now received the information prices firmed up, okay? And generally, these two pieces of land are still in the 40%. High 40% to low 50% range of loan to value ratio. Our lead bank on the particular agent bank on this loan is actively try to market it at this point in time. And we have no information as to the success of their marketing of it.

Okay. Then one last question --

I take that back. Carrying cost is based on the December 31st -- December 31st, number one is 72%. The other one is 63%. 40% to 50% was the original appraisal so it has been -- value has been coming down from the previous appraisal.

Okay. Okay. And then the last question was just curious what drove the decrease in the margin this quarter? Was it primarily interest reversals?

Estimated that if it wasn't for the interest reversal, our net interest would be 3.4%.

3.4%. Okay. So, it would have been up. Okay. All right. Thanks so much, Li.

You're welcome.

Thank you. Our next question is from the line of Aaron Deer with Sandler O'Neill. Please go ahead.

Hi, thanks, guys. Just following up on Joe's question. With respect to the appraisals. When it has been more than a month, do you index the collateral values to the last known appraisal?

Generally speaking, what we're following were regulatory guidelines and other accounting guidelines. When they're over six months, we start to index it. However, we're paying attention to some obvious area that may be showing big weaknesses on the whole situation. And because generally speaking, when it is one month old you don't even have the information to index it.

Right. Okay. And then you note in the press release that CRE and CNI still seems to be holding up. Reasonably well. Yet I guess just given the deterioration in the broader economic environment, not withstanding some of the positive signs that you mentioned, I guess I'm just surprised that maybe we wouldn't see reserving more, just to reflect the general economic environment and the potential problems that are likely to come down on those portfolios.

To answer your second question first, we are making increases to the reserve on the so-called past portfolio qualitative factors on the situation. In fact, we just on December, we put a $1 million more on the general qualitative item to -- in light of the weaknesses of the economy and the commercial real estate. Now to be more specific, on a commercial real estate side, and I want to tell you that it is our judgment that there are three portfolio commercial real estate which is more pressured than the other situation.

Number one portfolio is retail. Preferred Bank has about $82 million in retail. With the average size of the retail property is about $3 million. And when we originate the loan, the loan to value ratio averaged about 62% and immediately after the number of years of pay down, the loan to value ratio would have been less. And given the economy deterioration, there may be some value changes but when we stress test it, there was a higher cap rate and the rental rate, we didn't notice anything that immediate situation to worry about it. And by the way, we do stress test on a quarterly basis on these kind of things.

And also, on the office portfolio which is the second thing that we think is weak. And the office portfolio is basically -- we only have $55 million of that portfolio. And the average loan size is $1.6 million or $1.7 million. The loan when it is originate is about 58% loan to value ratio. Again, the DCR is over 1.7%, I believe. We're also quarterly stress test it. When we stress test it, we find there is problem and we then have to increase our reserve.

Okay. And then I guess, you highlighted the declines in the residential land and construction. Yet the overall construction book looked like it held relatively steady which I guess would suggest that commercial construction is on the rise. At least slightly. Can you talk about what kind of projects those are and how they are performing?

Basically, those are [common] projects. We have fewer common project in prime west side of Los Angeles. We are still starting to funding up. And the loan to value ratio, that was originating 2008 or late -- 2008 either early or late. These are the things that we do admit are probably at the level of low 60% on loan to value ratio. And at the cap rate is already represents some of the weaknesses. So even with the further cap rate increases, we still feel they're very much reasonably priced situation. We're fairly comfortable with these products.

And these would be to commercial customers who are building properties for themselves?

No, these are basically apartments, multifamily housing.

Oh, it is multifamily? Okay.

Yes. Obviously, there's funding up over one office building that was leased by US Marshall, leased to US Marshall, it was a long-term lease. That a pre-lease too.

Okay, great. Thank you, Li.

Okay.

Thank you. Our next question comes from the line of Joe Gladue with B. Riley.

Hi, Li.

Hi, Joe.

I guess I wanted to ask a question, I guess on the other than temporary impairment charges you saw, in the quarter, I guess still surprised to see a little more Freddie Mac in there. Just wondering how much some of those things are written down to now?

Okay. Ed will answer that question.

Hi, Joe.

Hi, Ed.

Well, in terms of Freddie Mac, basically, we're carrying these originally $7.25 million par value, Freddie Mac preferreds are now carrying just under $100,000 in our book value. So, the write-down this quarter was about $23,000 on Freddie Mac. We have one corporate which we wrote down for about $220,000. This is a corporate we had taken OTTI charges in previous quarters. That is now written down to about $0.32 on the dollar.

In terms of the trust preferred CDOs, that was a little trickier this quarter. As you probably saw in the press release, we were an early adopter of the three new FSPs that came out which sought to clarify statement 157. And as such, we're working through the process. We think we have a good number in terms of the $650,000 OTTI, but we're still working through that with us and with KCMG to make sure that number is solid.

In terms of the trust preferred CDOs on a par value of just under $8 million. We own them at about $0.62 on the dollar. The market value, when you take into account both credit impairment and noncredit impairment, and in light of the new rules, you now do not need to write down the noncredit-related portion of that impairment. Those are marked at about $0.29 on the dollar. So the difference between the mark and the current book value excluding the OTTI charges runs through other comprehensive income and is an adjustment to equity and doesn't run through earnings.

Okay. And I guess one other question on the net interest margin. Given that you're I guess using the temporary liquidity guarantee program and using some of that to reduce some of your more expensive deposits. Just wondering if you could give us your thoughts on net interest margin going forward and how those of those things will affect it?

We are expecting that our interest reversal from the 90 days past due category to reduce going forward. And also, another factor is that some of our older TCD will continue to reprice to a lower level and going forward. And we don't see the income side which is the loan side of the revenue yield which will be changing anything significantly either upwards or downwards. Having said that, we're forecasting a cost changes in our interest costs and also hopefully that the interest rate reverse -- interest reversal on the nonaccrual will also be reducing so. All in all, we think that will be improving.

Okay. All right. Thank you. That's all I had.

Thank you. Our next question is from the line of James Abbott with FBR Capital Markets. Please go ahead.

Hi, good evening.

Hi, how are you?

Good, thank you. Question on the REO expense and maybe what you're seeing, is that due to sale of properties in the foreclosure process? Is it a function of selling nonperforming assets to third parties? Take me through that if you can a little bit.

No. The sale -- we have a sale history is so far has been pretty good. In this particular quarter, we've reported a small gain on the sale, okay? Of the assets. There has been -- well, we think that we have written down these REO far enough. So when we actually liquidate some of the assets, we have a small gain of $100,000. But these REO expenses are related to the property tax. Some piece of land, the continuance of the track map, I mean this kind of expenses related to that and the carrying costs.

Okay. So you are -- it is fair to say that you've been aggressive in writing down the value of the property and so those charges are running through net chargeoffs? When they're in the foreclosure process, you're not having to write them down further once they -- ?

Actually, one day, REO, if you look at the past two press releases, you find out that we have revalued the REO continuously just like we revalued the loan. So any time we've seen the value changes, we will immediately write it downwards.

Yes. Okay. But this particular -- I'm sorry.

This particular quarter, we have $2.3 million write-down on one of the piece of the loans. Okay. One of the piece of the REO. After we took it to REO and it's been revalued and reappraised immediately and then we got the number, we have provided $2.3 million. In fact, that appraisal is arrived to us in April.

Okay. That's what I was trying to get at. So, it is almost $3 million in the quarter of REO expense. $2.3 million was due to the write-down of one particular loan?

That's right.

Okay. And what was the original face value?

Face value was original $7 million something and then now it is down to $5 million plus.

And the chargeoff you took through the provision expense was how much?

We didn't take much charge off this particular quarter.

No, no, no. On that particular loan. I am trying to understand the methodology here.

Original charge off we took is I believe -- first charge off we took is $5 million.

So, it was a $5 million chargeoff then a $2.3 million REO charge?

Yes.

Okay. So, it is written down almost the entire amount. It is written down to zero then?

It is written down -- the loan was originally $12 million something.

Ah.

The first step is $5 million charge off. Second step, after then we put in to REO at the $7 million level then we talk about $2.3 million in valuation change.

Got it. I apologize for being slow on keeping up there. Okay. That's helpful. What type of property was that?

That was a conglomerate piece of land, located in four or five -- five different properties. And there was a group of banks that jointly lend to a developer that went bad.

Inland empire, residential construction type land?

There is one piece of land that, like 300 lots, finished lots in Arizona, in Prescott, Arizona. Right around the golf course. Another piece of property in the 77 lots right on the finished lots in the golf course on Corona. And then there is a rather raw land in Lancaster valley. But that was very small. And its buyer is already standing by. And we enter into escrow going to sell it slightly above appraisal value. And there's also another near finished lots in [Tahashapee], California. So, it is all over the place.

Okay. Okay. And how much other of the REO balance is at risk of these larger charges? It is helpful in trying to figure out the expense side of the P&L statement is trying to understand a little bit of the methodology so I appreciate it.

We think what we try to do is we try to appraise it as fast as we can. As you realize, we came out appraised every quarter. So, our policy is when we come to the six month time, our new policy, we will reappraise. In the meantime, we're keeping eye on those things as much information as possible, okay? We cannot tell you how much more the additional write-down in the REO is. We're saying that at current time, we try to be -- try to write down as much as possible that we can see.

Okay.

In fact, the $5.2 million one, we think the final recovery will be higher than that because early indication of the broker reports indicating what they can sell this property at is basically between 10% to 20% above the carrying value of REO.

Okay. Okay. That's helpful. See if I had -- one of my other questions was focused on whether you have -- net interest margin trends going forward or maybe another way to look at it is the net interest margin in March excluding credit costs. I don't know if you have something like that? Just trying to get a handle on a good run rate for the margin.

We don't -- I mean I cannot tell you March situation. I can tell you the first quarter, Ed, will you repeat on first quarter what it will be?

Yes. First quarter between interest on new nonaccruals that was reversed out and the effect of nonexisting accrual loans that were not earning interest, the margin would have been 345. I would imagine March is probably just a touch higher than January and February as you indicated earlier. As these higher priced CDs continue to run off and be replaced at lower costs.

So as we think about the margin, it will be perhaps south of 345 because of credit costs associated or look of interest paid but that's the idea? Okay.

I would say without any further interest reversals and including the effect of existing nonaccrual loans, you're probably looking at a margin of around 310.

Okay. That's very helpful. And any outlook on expenses going forward for the -- you've got, excluding the REO expenses, any outlook on compensation expense?

We are continuously slowly trimming down on our payroll. And -- but to start with, we run a very lean shop. With our asset sides, used to be one of the highest assets per employee banks. Compare very favorably with our peer group. So, by nature, we don't have much of a slimming down. We're expecting on the production side, there will be some further adjustment but, that will be partially offset by the need to increase on the administration side such as accounting and such as credit, okay? But net we're looking forward to a little bit more downward adjustment on compensation cost.

So net expense will be down a little bit. Otherwise, it is a fairly decent run rate then?

Yes.

Okay. Thank you, again, for your time.

You're welcome

Thank you. And our next question is from the line of Don Worthington with Howe Barnes Hoefer & Arnett. Please go ahead.

Hi, Li and hi, Ed. A couple of things. On the Oakland REO project, I know you've been waiting for awhile to get this rezoning approval. Do you have any idea how long that might take?

I mean I just want to report to you that after we tried the situation, the previous people that were doing the work, okay, that was seems to be -- has been giving us a report different than we actually suspect. We later on -- I mean our Board went out and would you believe our loan committee Chairman was the one that went out and find someone he really knows about the business over in Oakland, so on. And give us a second opinion. And a second opinion comes and change course in terms of working situation. And in net in net, it takes another 11 or 12 months.

Okay. And then in terms of any update on the status of the T.A.R.P. application?

Ed, you have information, right?

No. You'll know when we know. Don, no still have not heard yet. We believe there have been positive developments in that regard. But we still do not have any confirmation as to approval or not.

And any other thoughts on whether you would take it if it was approved?

Can we say something about it? We can't.

Yes.

One thing -- most likely if you asked me today, with what I see today, I'm saying that the 75%, we don't want to take it and 25% we would take it. However, the second quarter activity is really the key. If we see the market is improving and because of limited exposure in the so-called trouble CIE area, okay as with the depressed CIE area, we believe there's absolutely we don't need it. It was all kind of stress tests we're running from other things. Having said that, obviously there are things that we're thinking about to try to improve ourselves in that particular respect. And we should be able to -- we should be announcing something within two or three weeks.

Okay, great. And then finally, what's the rate that you're paying on the senior unsecured debt?

The interest rate on the senior unsecured is 2.74% plus we've got some capitalized legal costs plus you have to factor in the 1% FDIC guarantee. All in, it is about 3.90%.

Actually, I guess had one other. Li, you were talking about three segments of the CRE portfolio that we're weaker than others. You mentioned retail and office. What was the third one?

The third one is everybody is -- well I'm sorry, I didn't get into that the first time. It was the hospitality properties, okay. Hospitality properties are always under pressure these days. Okay? We all know that. Our hospitality total portfolio is roughly 3% of our total portfolio in our CIE which amounts to about $17 million or something. So, by nature, it is a small portfolio. And most of our loans are with -- on the Marriott Hotel, branded hotel. And that was operated by a very, very, very successful hotel operator that owns about more than 50 properties in California and was big net worth. It was a big name in that particular industry. So, so far, these are really basically, we participate in another bank in doing things. So far the report we got is they don't see any string in that -- from this borrower.

Okay. All right. Thank you.

Thank you. (Operator Instructions). Our next question comes from the line of Julianna Balicka with KBW. Please go ahead.

Good afternoon.

Hi.

Hi. I have a couple of quick questions since a lot of the questions have already been asked. What is your total number of outstanding loan participations?

At peak time, we have 19%. I don't have an actual number on the situation right now. I think it is much reduced from that. We will be running this number fairly soon. Okay?

Okay.

And we will call you back, okay? In fact, Bob, would you go ahead and try to figure that out and then we'll call Julianna back, okay?

Great. Thank you. And then the second question I have, what is your largest performing construction loan right now?

Largest performing construction loan is $14 million, I think.

And your largest performing land loan?

What is the [Test Laquarie], I think that is the largest -- I think it is $13 to $14 million or so.

Great. I guess that's -- I have a lot smaller question. So I'll step back for a minute.

Okay.

Thank you. We do is have a follow-up question from the line of James Abbott with FBR Capital Markets. Please go ahead.

Sorry. One quick follow-up is maybe if you can give us some discussion on commercial real estate, the mini perm stuff. If it were to be reappraised today, I've got your slide show presentation from you latest conference appearance, if you were to reappraise those what would you expect those values to have done? Have you had a chance to reappraise any of the commercial property?

Where to the extent possible we would try to persuade our customer to reappraise that. To the extent we find out the center in some kind of string, we will try to reappraise that. First of all, let me just try to tell you our procedure is that it has been established procedure ever since about ten, 15 years ago. We -- twice a year, we send our officers and it must the officer that is not associate with this particular loan, go out and physically visit the property. And the key situation is to see the occupancy in the property. And then the maintenance of the property. The condition of the property. And then come back, make a separate report about these things.

And this report we submit it to our -- to the Board of Director review for this information. Then after we've done that, they were pretty much showed all of the tenants are there. Then run through the stress test, okay. Stress test include interest rate changes. Up to -- I mean because some of the loans are really floating rate loans up to 200% which certainly is not the problem today. There's no immediate interest raised string at this point in time. But we do it anyway.

Another one, stress recalculation is increased vacancy rate calculation and then the cap rate, we figure out the cap rate calculation. To the extent the stress test provider shows any weakness on the property then we start to order appraisal or talk to the customer looking into it. Or have them -- and afterwards, if we think that value is really being impaired, we will try to ask them to provide additional collaterals.

Okay. And what I'm hearing is that cap rates have moved to about the 8% handle from in the 4%, 4.5%, 5%.

That is something we haven't found. I think it is all over the place. I think the cap rate is about 6% to even 8.5%. Higher than that. But Jim, the bigger the property is, the harder they can find financing these days. And financing for these property is really the key. The smaller the property there is, the easier they can find financing. And also the thing, easier for, the owner to handle because these property are owned basically by individual investors. With an individual investor owning those properties as their personal investment. Most of them, like a doctor or a lawyer or somebody, they have cash flow personally.

And to the extent sometime when the property is under transitional lease situation, they usually can make up a cash flow very easily. And being the property is small, there is enough people that want to step in if the problem happens, okay. So, therefore, the cap rate related to these properties is not increasing as the national average of people fearing of in the situation. And the cash flow side is much easier to handle.

Now, I have earlier stated that our average size of our retail property is $3 million plus and our average size of our office property is about $1.6 million. So, that puts us in sort of like, in my opinion, in a little bit more safer ground. As compared to the so called the national structure a bit more than we have one large borrower running over and our global cash flow partner have to file bankruptcy type of thing.

Okay. And have you had an appraisal or reappraisal done that you can think of that kind of give us a sense, not saying that this would apply to the entire portfolio but --

We may have one or two but this question coming it hits us into left field. We may have one or two reappraisals being done on the renewal of the loans. To the best of my recollection, at this point in time, is that it is still staying within reasonable range, okay. And -- but however, our stress test is pretty much following the same thing as what the appraisal would have done anyway.

Okay. Okay. All right. Hi, thank you very much again.

You're welcome.

Thank you. There are no further questions in the queue at this time. I would like to turn the call back to management for any closing comments.

Well, if there are no questions, thank you, everyone for your interest. I know it is Friday. It is awful inconvenient for you but we're earlier in the day it becomes very selfish and personal reasons because I'm boarding on the airplane tonight to go to far east. I need a vacation. So I hope you will forgive me for that. For once, next time, I promise I won't do that to you.

But having said that, that as I said, my overall tune is that we're not quite as pessimistic as we were three months ago. And we hope that next quarter we can even be somewhat optimistic. And this is good certainly not only for us or anything, it is really for the -- for the industry. And then I do -- I do pray to somebody up there this will happen. Okay. Thank you.

Thank you. Ladies and gentlemen, this concludes the Preferred Bank first quarter 2009 conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 or 1-800-406-2236 and enter access code, 11130393 followed by the pound sign. We thank you for your participation. You may now disconnect.