Preferred Bank (PFBC) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Preferred Bank third-quarter conference call. At this time all participants are in a listen-only mode. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Thursday, October 19, 2006. I would now like to turn the conference over to Lasse Glassen of the Financial Relations Board. Please go ahead, sir.

Thank you. Good day, everyone, and thanks for joining us to discuss Preferred Bank's results for the third quarter ended September 30, 2006. With us today from management are Mr. Li Yu, Chairman, President and Chief Executive Officer, Walt Duchanin, 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 list 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 materialize 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 would now like to turn the call over to Mr. Li Yu.

Thank you very much. Good morning, ladies and gentlemen. I am pleased to report the third quarter of 2006 is a record quarter for Preferred Bank. We earned $6.1 million net income, which is 39% better than same quarter previous year.

.More importantly, diluted earnings per share increased 37% to $0.86 per share. We reached another benchmark; our return on assets is actually 2.02%. Internally, we feel it is a very important number for all of us, for the people working at Preferred Bank, and we take that in great stride. And our net interest income, although increased slightly, was actually better than we had previously expected. Because we did forecast increased deposit costs in the third quarter.

And it is true everywhere in the industry that deposits become harder to get and more expensive to get, and everybody is seeing the shift from the core accounts to the higher interest rate accounts. But nevertheless, the Bank has seen year-to-year deposit increase of over 12%, and we hope that we can do better than that going forward.

This is a short summary of what (indiscernible) the quarter, and we would like to entertain questions from the audience.

(OPERATOR INSTRUCTIONS). Joe Morford, RBC Dain Rauscher.

Congratulations on the 2% ROA.

Thank you very much.

I guess a couple questions. I was curious about the statement in the release about that you feel you're just going to have to continue to raise rates on deposits, and almost sounds like just kind of have given in there. What about other ways for funding -- liquidity in the securities portfolio, tapping some of the wholesale funding alternatives, maybe slowing the growth a little bit? Just talk about some of those issues, I guess.

We have capacity to do wholesale funding going forward. In fact, we have enough capacity remaining going forward to fund our loan growth. But internally, we feel that the progress over the long-term is the real engine for our growth. Overstretched balance sheet is something that we would like to reserve on the -- how should I say -- when-and-if-needed basis. Our long-term goal is always grow deposits parallel with the loan growth. And I think my comment on that is that reflects our internal determination that we do need to bring the deposits up in the same level of loan growth.

And what -- what are the implications then for the margin, given the pressure of higher costs? It was up; kind of the most modest increase we've seen. Have we peaked out here in terms of the margin? What are we likely to see through year-end? Maybe (inaudible)

We cannot, obviously, forecast about the margin. But mathematically, I'd like to outline what some of the components [are there]. You know that our balance sheet is very sensitive. And with the environment of no rate increases, the only two components left is -- one, how much more loan growth we will have and what's the [asset] shift relating to that; and the other side is what the deposit increase is. I think it's pretty much obvious what's in the near future.

But I'd like to emphasize one thing. Again, internally, we look at net interest margin as only a number byproduct of our plan. Give an example. For any new loan we're doing, the net interest spread between the new loan and new deposits is always less our current net interest margin. However, it does create more earnings on our income statement. It does increase our earnings per share. And that [has been] always our emphasis and our focus.

I guess, lastly, any comments on the pace of loan growth, expectations going forward? It was a little slower this quarter, yet also a lot of it is still coming from the construction side. How are you feeling about the pipelines there?

(indiscernible) it looks like we are a little bit slower this quarter compared to the last quarter. One thing that we have previously talked about it is that we can never anticipate every quarter to be about the same. Sometimes it's hard to control the quarter-end numbers. For this quarter-end, for instance, we have three or four loans we're slated to close in the second half of September. But for one reason or the other, they all closed in the early part of October. So, it is rather difficult to control the quarter-end number for our sake. But we see ourselves that -- continue having the loan inflow in about the same manner as before.

And also, another situation -- in all the construction loans we have had committed earlier part this year or sometime even last year to continue the funding, the disbursement at this point in time. So, this is something that, as we said earlier, that we have to fund additional deposits to keep up with the loan growth.

Don Worthington, Hoefer & Arnett.

A couple of questions, maybe more on the credit side. Are you seeing any signs of any weakening in credit just in general in the marketplace, be it underwriting or just market conditions that would give you any pause at this point?

I will give you my answer, but I also will have Walt Duchanin also pitch in on that part. From what I can see is that [our competitors and us] all are pretty much consistent with the underwriting standard. And we have maintained enough margin between the loans that we are granting and then the loan dollar amount -- [the value] dollar amount of the (indiscernible) when it comes to real estate. The margin is generally quite sufficient in the current visibility to handle whatever is perceived to be the price softening is (indiscernible). By the way, price softening is only to the real estate area. So in short, we haven't seen anything that is worrying us yet.

Walt, would you want to add to that?

Good morning, Don. Just to amplify what Li said, our average loan to value on our construction loans is 59.6%. And although we are reading the same press you are, of all the softening in prices and this type of thing, quite honestly we are not seeing any slowdown at our end at this time in absorption of housing construction, although we are being vigilant in watching that.

On more the commercial real estate side, vacant seats remain low, high occupancies (indiscernible) seem to be increasing across the board when you talk about retail or the other types. And so right now the environment continues to look benign.

In terms of your CDs, which is about 60% of your deposit base, how much, roughly, is retail versus wholesale?

We have about, at this point in time -- Ed, would you want to give a total number about the wholesale number of CDs?

I think the wholesale number is probably around the -- are you referring to brokered or otherwise, Don?

Primarily I was getting at the brokered.

I think the brokered total is about 35 million of that.

James Abbott, Friedman Billings Ramsey.

It's Dave Rochester here. Congrats on your quarter. Just a couple of quick questions. Could you provide us with some color on the margin and/or the cost of deposits in the month of September?

Ed, you want to do that?

I guess -- could you be a little more specific, Dave, in terms of what's your question? You want to know the overall cost of funds?

Maybe just the cost of deposits -- the cost of funds would be good as well -- for September, as well as what the margin was for September. Trying to get a sense for the trend during the quarter.

I think the margin for September on a non-taxable equivalent basis was about 516. And I think the cost of deposits overall -- I'm going to have to venture a guess. I don't have the number right in front of me; I apologize. But it's in the neighborhood of probably 330, 340. And overall cost of funds, obviously, taking into account 200-plus million of DDA, would be slightly below that.

In terms of pricing of commercial real estate loans, C&I, did you find that spreads were generally holding throughout the quarter? We've heard a lot of talk from a lot of banks about continuing competitive pressures. I'm just wondering what the pricing is doing on those fronts.

We find our loans to be -- pricing to be generally holding.

And in terms of the growth on the commercial real estate multi-family portfolio, that was down a little bit linked-quarter. Was that coming from just -- I know you mentioned timing. But were there other payoffs there, or weaker originations versus the second quarter? Any color there?

Actually, when you have commercial real estate and construction, sometimes they go hand-in-hand. We have construction loan to completion (indiscernible) it got switched to the finished product (indiscernible) commercial real estate. And the payoff suddenly comes -- from time to time the payoff can be different numbers, too. It's rather hard to predict a number of that, but the general trend is that both elements of the products still growing.

Let's see. Just in terms of the pipeline, I know at the end of the second quarter you'd mentioned it was fairly strong and stable with the first quarter. How would you characterize the third quarter end-of-quarter pipeline?

I don't see much difference between the third quarter and the second quarter.

Lastly, a little bit of housekeeping. I can't remember -- I think I know the answer to this. Are there any interest rate floors on your loans? I would guess that there probably aren't on most of them.

Interest rate floors?

Actually, there are rate floors on approximately 40% of the loan portfolio, Dave.

Just in a scenario where the Fed potentially -- this is all conjecture -- cuts rates maybe in the second half of '07, you would only expect to see --

We're [substantially] writing all the loans with a floor, the new loans.

All new loans with a floor? Is that what you just said? All new loans that you're writing right now?

We're trying to write floors on every loan we can at this time. Dave? One more thing. I just got handed some more information. Cost of funds including DDA was 331, and excluding DDA, 416. I just want to clarify.

And that is for the month of September?

That's correct.

(OPERATOR INSTRUCTIONS). [Terry Maltif], Sandler O'Neill.

A quick question; I want to make sure I understood you. You're saying that the margin in -- for the month of September was 516. So, if it was 523 for the quarter, and it was 522 last quarter, in order to average 523 and be 516 for the month of September, it had to really spike up and then spike -- maybe spike up in the first month of the quarter, and then spike all the way back down to get that. Is that essentially what happened?

One of the factors that [is] determining the net interest margin is the total (indiscernible), total assets. And then in the month of September, the total assets are substantially larger than the total assets of August and July. So, part of it is influenced by that. So, if we use the same number [average asset space], the 516 number -- in other words, if we use the same average for all three months and the same number of total assets, the number will be in excess about to 516.

Gentlemen, at this time I'm showing no additional questions in the queue. Please continue with any closing remarks you may have.

Thank you very much. Thank you for your interest in us. We internally are pleased with the quarter, and we hope that we can continue on our paths of operation going to the fourth quarter. Thank you.

Ladies and gentlemen, this does conclude the [Preferred Bank] third-quarter conference call. You may now disconnect.