Preferred Bank (PFBC) 2006 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Preferred Bank fourth quarter 2006 conference call. At this time all participants are in listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder this conference is being recorded today Wednesday, January 24, 2007. 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 fourth quarter ended December 31, 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 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.

Thank you very much. Good afternoon, ladies and gentlemen. Before I make my report, first of all I would like to apologize for a couple of typos. It is in the highlight section for the year. The last word of third dot and last word on the five dot, it is really million rather than billion. So we hope someday we will get there, but not yet.

I am pleased to report that the bank had a real good fourth quarter. And as a result, we have a record earning year in almost every direction. In the fourth quarter, we earned $0.94 a share. That was partially aided by a tax credit that we previously did not count in, equal about $0.021. And if you take that away, the bank would be earning roughly $0.915. On the loan side, the banks loan has grown approximately 88.5% quarter to quarter and the deposit -- we happen to have a good quarter on deposit growth, which is 9.8% for the quarter, or $104 million. And for the first time that our quarterly return on assets exceeded the benchmark of 2%.

And our net interest margin seems to be pretty much in line with what we think -- what we thought before. And then our deposit cost is pretty much in line with what we have expected. It came out to be 5.17. And efficiency ratio reached to the level of 30% sharp. So we are happy to report these results to you. And I am opening for questions.

(OPERATOR INSTRUCTIONS). Joe Gladue, Cohen & Co.

I guess I would just like to start out talking about maybe getting a little more color on the loan growth. It looks like both the mini-perm and construction loans saw really strong sequential growth from the third quarter. And I guess I have seen a number of other banks that have had slowdowns in loan growth this quarter. And I guess I'm wondering what types of projects you are seeing that growth from and how long that can continue at this pace?

The last question we really cannot answer, but our growth is basically pretty consistent. We see our pipeline is about the same at the end of last quarter. Even this quarter, we don't see much changes. And it is really the activity of our production team going out finding more assets opportunity for us. And we like to think that the housing market perceived slowdown maybe a situation a bit brighter than we previous thought it is. And also the vibrant section still stays in the commercial real estate. So these things does not change as we see looking to the future.

Whereabouts are they, I guess the residential construction projects? What areas are they in?

Basically, it is mostly in Southern California.

And those are for what level home? Are they for starter and lower, I guess, low to mid-level homes?

The majority of our project is starter and infill.

I guess, I'll ask the same question on the deposit side. You had very strong core growth and, again, none of that is, I guess, contrary to what I have seen from most of the other banks reporting so far this quarter. Again any explanation of why are you guys doing so much better?

Obviously, there is normal quarter-end activity. Our bank usually sees a bigger fourth quarter growth because many of the customers is trying to park the money in the end of the quarter and then distribute in the following quarter for their profit, or pay their tax, or whatever, okay. But having said that, compared to the previous years and previous quarter, it is exceptionally large. The only thing I can say to you is that we did internally mount up a more aggressive program in terms of getting out and getting more deposits in. And as a result, we are probably getting lucky compared to our competitors.

We do you sit in terms of, I guess, just deposit rates versus, I guess, your main competitor?

Our deposit rates have always been approximately the same as other competitors. We are never the highest, never the lowest. And then our total cost come in, as you can see compared to last quarter, the increase is pretty much expected.

Well, I'll step back and let somebody else in the queue. Thank you.

Aaron Deer, RBC Capital Markets.

Hi Lee. It is Joe Morford calling. Congratulations on a good quarter and a good year.

Thank you.

I guess first on the margin, it, like you said, came in pretty much as expected. Given that kind of outlook now for perhaps a stable rate environment, what is your current thoughts on the margin looking out for '07 as a whole?

Well, at this point in time, most of our deposit costs the change is from last quarter is really coming from the TCD side and the majority of the changes coming from the repricing of the TCD. We have not changed the structure of our deposit rate in the fourth quarter any noticeable amount from the third quarter. And having that, we have one and a half quarter of a stable interest-rate, most of our repricing, a significant portion of our repricing is already done. So on the rate, no change bases. I would see some additional adjustments, but wouldn't expect very much.

Okay. So just maybe some gradual compression then.

We hope not, but it may happen.

And then, obviously it is a pretty small number, but just curious of the inflow into the non-accrual this quarter, the 1.1 million or so. Any color on that? And then maybe more broadly speaking, just what you are seeing in terms of the credit outlook right now.

First of all, I will have Walt answer the non-accrual, but I want to report to you that on the 30 to 89 past due level there is nothing. So, Walt would you comment on the non-accrual?

Sure. That is a relationship that where there is a partnership dispute. And we are on a piece of property where we are well-covered and the loan-to-value is less than 50%. So we anticipate that is going to be resolved one way or the other. Worst case basis, in the second quarter. Joe, it is sort of a just a roll-in rollout kind of thing. We had something at the end of the third quarter last of '06 and that got resolved. And that was an approximate the same amount. So it is just the normal --

Ins and outs. Okay. Fair enough. Thanks so much.

James Abbott, Friedman, Billings, Ramsey.

It was obviously a wonderful quarter.

Thank you.

And you worked very hard. The question I have is related to the expense side. That is probably the one area with where I have been consistently wrong in forecasting Preferred Bank's performance. And obviously the loan growth has been phenomenal. I was just doing some quick math on a year-over-year basis. As far as loan growth, it is over -- it is right around $240 million. And expenses has grown on an annualized basis year-over-year -- I am talking salary expense anyway -- year-over-year it has grown only $2 million. So fairly small ratios there if you do that math.

What is your thought on sustainability of the expense level here? When do you hit that point where you need to increase the staff to maintain the portfolio, or to do Sarbanes-Oxley stuff, or Bank Secrecy Act stuff, or whatever it is that is required that other banks are -- everybody hits that point at some point. Where do you see that?

In fact, on the Sarbanes-Oxley side of it, we have already extended the professional fee needed and all the work that is needed during the current year. Going forward, will be relatively insignificant expenses as compared to this year. On the staff level side, I do have about eight loan officer sitting in the conference room listening to the conference phone call. I am going to be facetiously saying that. That is because maybe they finally get off their -- get out of there their chairs and do a little bit more that they finally they should be doing. That result is increased efficiency. But that is only a joke.

But we expect there is some room of additional efficiency from a current level of staff. But we also have been growing our loan staff all the way along. So as we go forward, we do. But one of the things that we like to think is that there are good performances in our loan staff. And we continue to see they are some way improving the future, but I wouldn't count it that much. 30% efficiency level is hard to repeat.

I don't know whether I answer the question or not.

Well I guess maybe do you feel that maybe on a sliding scale one to 10, 10 being more than adequate in the form of people on staff to maintain the portfolio once the loans have been originated, back office, etc. Obviously you have enough production staff to keep feeding the fire there. But it's more on the back office side that I think I am wondering about. Is there enough expense there or are you closer to having to --

Well so far we have been examined by -- just finished examination by the state, by all kinds of people, by loan review and nobody has come up with any, how should I say, comment or criticism about our portfolio management yet.

I guess that answers my question. What do you see as far as expense growth in 2007? I know you don't give guidance, but should we expect anything outside of normal inflationary expenses -- expense growth?

There will be always continuous growth, certain personnel along with the assets growth. And then there are continuous inflationary-type of situation, but I think the whole bank is dedicated to operate efficiently. So as much as we can control expenses that we will continue to do that. I know it is kind of a generalized statement. Probably we say that we have always been very cost control-minded bank and we're going continue to do that.

And then maybe last question, I am sorry I am taking so much time, but I was wondering if you could update us on the average loan size. I don't know if you have it by type or if you have the overall portfolio. Just trying to get a sense as to where that stands?

Walt, do you have it?

I have them and in the construction loan portfolio, it is right under $2 million and is about 1.5 on the mini-perm. But again, I would caution that that is an arithmetic average. It is probably better put into what is our sweet spot? And that is probably in the area of between $2 million to $6 million. And that is where we see a lot of our transactions.

And actually, any large loans that were booked during the quarter that would have skewed that loan growth number at all?

There always been some relatively sizable loans, but in a total percentage of loan portfolio. So for the large loan versus the other loan, we maintain pretty much the same percentage.

So in the fourth quarter there was some pretty good, there was one or two big loans that came on?

No, pretty much the same situation as we have done previously.

Oh, I'm sorry. Okay. Thank you for clarifying. Thank you very much.

(OPERATOR INSTRUCTIONS). Manuel Ramirez, KBW.

Hi, this actually Julianna. I had two questions. One that was just essentially asked by the previous person, but actually could you just refresh our memory. What was the situation last quarter as to the percentage of large loans relative to your other loans?

We didn't keep exact percentage of the whole situation. What I am just trying to say the number of large loans we are doing in terms of -- as compared to total active portfolio is about the same, thoroughly consistent during the year.

Right, but you haven't --

We don't have statistics to say how many of the large loans.

And you have any information about concentrations in terms of any developers or anything under the construction?

Okay, Walter do you have any concentration situations?

We don't track by developer. You know, we as well as the other banks do have a concentration limit in terms of legal lending limit. And so certainly we are not, we have not exceeded any in any developer. But we don't track it any more than that.

Okay. And then I had one more accounting question. Was, did you have any FAS 91 adjustments this quarter?

Did you have any adjustments this quarter? That was pretty consistent?

Yes, it has been very consistent. Could you maybe clarify that and be more specific as to what you would mean by an adjustment.

In the construction portfolio.

In terms of our internal cost to originate?

Yes.

The answer would be no.

Tom [Doheny], Tribeca Global Management.

Thanks for taking my call. Li, I think last quarter you may have given out what the quarter, or the actually the monthly margin and cost of deposits were for September. I was wondering if you had that information for December.

Actually, the last quarter, okay, the number was given out is pre-adjustment. We don't really keep that. We usually do quarter-by-quarter because during the quarter, there are months of having high balances, there are months having low balances. And then being the differences of the high to low balance, well, basically does not reflect additional incremental cost or sizable incremental cost. If not purified and if not adjusted, it is kind of dangerous to forecast into the future.

We don't do that internally. And last time we gave that information out probably mislead the people. You guys will probably think that our net interest margin will be way below 5.16 as we told you last time that December -- I mean September our net interest on 5.16. If you were use that number, you will result in the fourth quarter number forecast way below 5.16, which is something of a pitfall.

So I like to say one thing is that the earlier question -- answer to the earlier question regarding net interest margin is concerned, much of our cost adjustment has been done. Only a little bit remaining ahead. And then with stable interest-rate environments, we don't expect a major changes.

In the margin overall?

Yes.

Any update in terms of the repricing of the CD portfolio. What you saw in the quarter, what you see going forward?

Well, CD portfolio, our CD portfolio is a little less than six months in age. And being four months of the six month is already gone, so we have 5.25 (indiscernible) rate. So what is remaining, the repricing as we last estimate it is is relatively insignificant.

If there are no further questions, Mr. Yi, we will turn the conference back to you for any closing comments.

Well, thank you very much. And we hope that this is the eighth quarter we have reported continuous growth in earnings, growth in the deposit, growth in loans and we hope we can continue this trend. Thank you for your interest.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. If you would like to listen to a replay of today's conference, you may dial in to 303-590-3000 or 1-800-405-2236 with access code 11082352 and then followed by the pound sign. Once again, those numbers are 303-590-3000 or 1-800-405-2236 with access code 11082352 and then the pound sign. We thank you again for your participation and at this time you may disconnect.