Preferred Bank Q1 2008 Earnings Call Transcript

May. 9.08 | About: Preferred Bank (PFBC)

Preferred Bank (NASDAQ:PFBC)

Q1 2008 Earnings Call

April 24, 2008 5:00 pm ET

Executives

Lasse Glassen - VP, Financial Relations Board

Li Yu - Chairman, President and CEO

Ed Czajka - CFO

Analysts

Joe Morford - RBC Capital

Julianna Balicka - KBW

Don Worthington - Howe Barnes Hoefer

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Preferred Bank First Quarter 2008 Conference Call. (Operator Instructions) I would now like to turn the conference over to Lasse Glassen, Financial Relations Board. Please go ahead.

Lasse A. Glassen

Thank you. Good day, everyone, and thanks for joining us to discuss Preferred Bank’s results for the first quarter ended March 31st, 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 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 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 prove incorrect, Preferred Bank 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 would now like to turn the call over to Mr. Li Yu. Mr. Yu?

Li Yu

Thank you very much, Lasse. Good afternoon, ladies and gentlemen. The first quarter of 2008 is really a challenging quarter for us. Our profit was down to $0.34 a share, which is a big decrease 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, there has been 225 basis points rate reduction by the Federal Reserve. And with our asset sensitive balance sheet, most of the effect is showing up in the immediate following quarter, and also the increased level of non-performing loans has reduced net interest income somewhat.

Now at this point in time, I am personally seeing no light at the end of tunnel of the real estate market. Going forward, values may indeed further reduce. Although, it is our observation that the price reduction may have moderated somewhat, the main problem exists in the marketplace is the buyers 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 are looking forward to that net interest margin to stabilize within the near future. We will obviously approach our business very cautiously, and make sure at all times that our capital level will stay well capitalized in all definitions. At March 31st, our primary 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 fourth quarter of 2007. And on the deposit side, average deposits increased roughly $450 million from the fourth quarter, which is almost 4%. And with... from that... we were surprised with that, because as of today, we are not really very competitive in our marketplace, and also within the entire 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 account we have been feeling fairly good about that.

And with that I would like to turn over to your questions.

Question-and-Answer Session

Operator

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

Joe Morford - RBC Capital

Thanks. Good afternoon, Li.

Li Yu

Hi, Joe.

Joe Morford - RBC Capital

I guess, the first question would just be on the credit, could you talk a little bit about the inflows and any outflows? I’m curious as to where we are in the quarter, just kind of the movement there?

Li Yu

On the credit side that -- really the provisions are really related to the same three loans that we mentioned as of December 31st being seriously impaired. The collateral value has further reduced on these three loans, and out of this total loan provision that majority of the loan loss provision are related to these loans. Of which two of them is land... or it will be real... construction loan, and one of them is a C&I loan. We have a great hope that we will have a reasonable recovery on the C&I loan, but we will rather reserve as much as we can at this point of time since the recovery is a future effort.

On the other areas, we don’t see too many loans go into the impairment state, although a couple loans have turned from a performing state to non-performing, as simply the project borrower has found their project was closed, that the sale has been slowed and one of our interest reserve that we have to put it into a non-performing status. Most of these projects still have value much higher than the loan amount, and we are looking forward hopefully that... to recover the interest when and if they sold all the units.

Joe Morford - RBC Capital

And specifically it looked like there was a new commercial real estate loan, a new construction loan that went into non-accrual, any color on... what basis?

Li Yu

There is one loan, that’s the same... one of the three loans that we cited was impaired at December 31st.

Joe Morford - RBC Capital

Oh, okay. Yup.

Li Yu

That went from a substandard level to the non-accrual status...

Joe Morford - RBC Capital

Yes. Okay.

Li Yu

-- for 15 million. That’s the majority of that. There are two major loans. One of them is $1.5 million, okay, and the other one is, I think, it is $2 million, that went into the non-performing stage.

Joe Morford - RBC Capital

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

Li Yu

Well, we have also increased factors in the general reserve. These are the specific reserves we are talking about. We also increased the general reserve in recognizing certain factors have changed. Okay. So, yes, it is mostly related to these three situations. New loans that’s migrated into the so-called the trouble area is relatively insignificant, both in dollar amount and the number of loans.

Joe Morford - RBC Capital

Okay. And then lastly just a question on capital and the dividend. I mean, 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?

Li Yu

We have two (inaudible) sides representing the counterpart of several of your firms, that was in the conference call tonight has came in, and run the analysis for us, and at the worst-case scenario that we assume, we will be staying ahead of a 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 additional capital for us.

Joe Morford - RBC Capital

Okay.

Li Yu

So, we are pretty comfortable with capital ratio and so on, but however, as 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.

Joe Morford - RBC Capital

Okay. Fair enough. Thanks so much, Li.

Li Yu

Thank you.

Operator

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

Unidentified Analyst

Hi, guys. This is actually (inaudible) on for Aaron. How are you today?

Li Yu

How are you?

Unidentified Analyst

Good. Thanks. Just a question on growth from 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 are fixed or floating?

Li Yu

Well, basically that most -- the commercial real estate is diversifying, different nature, there are hotels, there are apartments, largest increase is probably apartment loans, and then retail properties, and these are the majority of things. A couple of the invest... I mean, industrial properties, okay, and the rate... generally we are still doing the loan in the rate of... in the prime-related or LIBOR base rate situation, but there are several loans that we are doing on a fixed rate basis, and the yield today is frankly speaking better than the yield that we used to get.

Unidentified Analyst

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

Li Yu

We have not stopping in that... but we have not seen anything that make us to be very excited about doing that.

Unidentified Analyst

Okay.

Li Yu

The net result is that we do have a reduction of housing construction loans, but not significant enough, because the tradeoff is nothing big enough. In the meantime, some of the old construction loans that are still not completed have to be continued to fund the loan. But there is that net reductions.

Unidentified Analyst

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

Li Yu

Thank you.

Operator

Thank you. Our next question is from the line of Julianna Balicka with KBW. Please go ahead.

Julianna Balicka - KBW

Hi. Hello. How are you?

Li Yu

Hi. I am good. How are you?

Julianna Balicka - KBW

I was just going to ask a little bit more general outlook trend questions in terms of going forward in terms of reserves. I mean, your reserve level has increased nicely to 1.62, 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, preemptive, or will you continue to be increasing your reserves along with market deterioration?

Li Yu

Julianna, there is two ways I can answer this question properly. Probably, you have to piece two questions together to get the answer you want to have, okay.

Julianna Balicka - KBW

Okay.

Li Yu

Number one, we are very proactive in our... looking at our reserve. We don’t have that many construction and land loans in our entire bank. The number of the loans is a small number. So for instance, we will have weekly or bi-weekly total housekeeping in going over every loan that we have. When we have weaknesses, we like to identify them, and we like to provide reserve. But, when we are providing the reserve, we have to measure it based on FASB 114, which is whether there is any impairment or not. Okay. And luckily many of the project we are having, we’re still showing comfortable margin between the newly appraised value... we appraised value of these project, usually they are appraised in February or March, and some of it even in early April, we have been doing that, newly appraised value is still comfortably higher than the loan dollar amount. Okay.

But when and if we identify some project may be facing some problem, 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, and 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 already impaired loans. When and if that thing is seen, it is our job and it’s also that require that we immediately recognize that, and take into reserve.

Julianna Balicka - KBW

Right. It makes sense. And then, in terms of appraisals that you are doing on your portfolio, I mean, what kind of re-appraisals... what level of downward values are you seeing on them, particularly the April ones?

Li Yu

April ones, you see... for the month, it seems, we see in March and April seems to be the appraisals value has been... appraised value has been not too much different than the earlier amount. I mean, it’s a suitable small decrease, it’s not a big decrease. That’s why I commented earlier, from our observation, it seems to be moderated, speed of price reduction is somewhat moderated. And personally, there is no scientific proof on the whole situation, there is no data to prove the situation. Personally, I did go out and talk to different... various loan people, including fellow bankers that’s friendly. And we discussed, and it seems to be generally we feel, the price is not that bad in terms of the reduction in price, but it is the mortgage unavailability.

Let me quote you a situation most recently, we have a customer who have nine units in escrow, but at the last minute they were told by one of the lending banks that 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-’83, and there was a requirement of 70% already causing a bloodbath all over the place, and this is 90% right now. So immediately that... the borrower had to switch it to another lender starting from ground zero and on. And unless this mortgage situation is going to be improved, and I think, the housing market will continue to have further depression, hopefully not taking price.

Julianna Balicka - KBW

All right. Okay. That makes sense. All right, I will step back now. Thank you very much.

Li Yu

Thank you.

Operator

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

Don Worthington - Howe Barnes Hoefer

Good afternoon, Li.

Li Yu

Hi, Don.

Don Worthington - Howe Barnes Hoefer

A couple things, one, give an update on that OREO project in Oakland?

Li Yu

Yes. We are actively pursuing, as I stated earlier, to develop the lower possible, which is the majority of the value is to increase the density from 38 units currently to 105 units. And based on the people that we are professionally engaged in and also the Land Use Attorney, such loan changes will be choppy. We should be cautiously optimistic about getting it closer to three -- third or fourth quarter, okay.

And but afterwards there will be entitlement process. We feel that when the entitlement process started, and I want to say that, that will be the time to market the property. Before that will be... value will be much lower, and if we do it later on, and I think, by that time we are hoping that the entire real estate market is better, so the whole thing will be easier mark-to-market and at better value. And to this date, we didn’t see value reduce from the... our loan level yet.

Don Worthington - Howe Barnes Hoefer

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?

Li Yu

Ed has got the number right in his finger tip.

Don Worthington - Howe Barnes Hoefer

Okay.

Ed Czajka

Hi, Don.

Don Worthington - Howe Barnes Hoefer

Hi, Ed.

Ed Czajka

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

Don Worthington - Howe Barnes Hoefer

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?

Li Yu

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

Don Worthington - Howe Barnes Hoefer

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

Li Yu

You have it, Ed.

Ed Czajka

I have got everything else here in front of me, Don. I think it was around 200,000 shares.

Don Worthington - Howe Barnes Hoefer

Okay. Great. Thank you.

Operator

Thank you. (Operator Instructions). Okay. We have no further audio questions. Continue.

Li Yu

Well, thank you very much that for your attention, for your interest, and if there are any further development on any of the subject we talk about in this press release, we certainly will be bringing it up to your attention immediately. Thank you very much.

Operator

Thank you. Ladies and gentlemen, this concludes the Preferred Bank first quarter 2008 conference. Thank you for your participation and 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!