Preferred Bank (PFBC) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Preferred Bank second-quarter 2007 conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded on Thursday, July 19, 2007.

At this time, I would like to turn today's presentation over to Lasse Glassen. Please go ahead.

Thank you. Good day everyone. Thanks for joining us to discuss Preferred Bank's results for the second quarter ended June 30, 2007. 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 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'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. Mr. Yu?

Thank you; good afternoon. My name is Li Yu. I'm with Preferred Bank. We are pleased to report that the record-setting quarter earning of $7 million, which is roughly 26% higher than same quarter last year. Our diluted EPS has risen to $0.65 a share, which again is roughly 25% higher than the year before.

We are generally quite happy with our net interest margins, which is pretty much the same as last quarter in a very difficult or challenging operating environment. And we managed to grow our bank and in the pace we think is reasonable. What makes us even a little bit more positive about things is that our credit quality remains the same. There are no signs of deterioration that we can see at this point in time.

So what that, I would like to open for questions.

(OPERATOR INSTRUCTIONS). Aaron Deer, Sandler O'Neill Asset Management.

Question, Li, you said, "No signs of deterioration." I'm just -- wonder if maybe you can give any additional detail you might have in terms of what is on the watch list or if there are specific areas --

Actually, that is what we really mean. There are no deterioration that we detected even on the watch list items, which remain fairly clean at this point in time. But I will let Walt to give you more information on that.

You know there is always a credit or a handful of credits in general that we track. But I think that my take on it is, is that we are not seeing any deterioration in any particular pockets of the portfolio and -- for example, residential or something like that, we're just so far, so good. Although, we're watching it. There is always individual credits that we enhance our scrutiny on and look to more carefully -- but for a variety of circumstances. But there's no trends at this point in time within our portfolio that we have spotted.

Okay, that is helpful. And then, I was pleased to see the margin seems to be holding in there quite well. Is there anything unusual going on there, or is it just things seem to be pretty well matched off? Do you see any deterioration in that going forward?

We see ourselves on the yield side, on the assets on the loans is about the same as quarter before. Although the new deal is coming in slightly lower prices, but for the quarter that we have a very slight asset shift, maybe makes a $0.01 difference on that -- like that on the mix shift in the loan yield side.

On the deposit, cost has been creeping up a little bit, like a couple pennies, a couple of basis points. But overall, the situation is about the same. So we're quite happy with that situation.

Any new -- given I guess just the fact that deposits have been a real challenge, have you guys set out on any new sort of initiatives to bring in more core deposits or is there anything going on there?

All I can tell you is that we just keep on work harder and try to do that. But if you notice that we did have some growth in our core deposits, especially on DDA side, for the second quarter as compared to a nationwide trend of losing balances for the quarter. So I guess our people have already delivered fairly good results by continuous cultivating our current accounts and new accounts.

It was certainly a very strong quarter. So congratulations, guys.

Thank you very much.

Don Worthington.

Howe Barnes Hoefer & Arnett. Just a couple things, one, this is a small number, but I noticed the professional service fees were up a bit in the quarter. Anything in particular driving that increase? It's about 800,000 versus (multiple speakers) --

Ed will answer your question.

That is essentially associated with a little bit of leftover from Q1 and Q2 SOX 404 work and the corresponding increased audit fees in relation to becoming SOX 404 compliant. So it is a little bit of a blip for the quarter. I think going forward, I don't think it's going to be a lot different than it was in Q2 but perhaps not quite as much in terms of the overall professional fees.

Any plans to open any new offices over the next 12 months or so?

We're working on it right now. We're working on a couple locations, a couple of cities. But it's a little bit too early to tell which one we end up signing the lease or recruit a group of talents that can man the branch.

Okay, thank you.

James Abbott, Friedman, Billings, & Ramsey.

I was wondering if you could touch on -- you did mention in the press release on the expenses coming down a little bit. And my question is related to the FAS 91, Deferred Costs. And I was wondering if that is a function of faster loan originations during the quarter. And if so, what is behind that trend or maybe if I'm off base there, if you could help me understand that?

In the second quarter in quantity of loans, we have done a lot more loans in the second quarter than we did in the first quarter. In number of loans that was either originated or renewed, second quarter has marked higher number. And because under the FASB 91 program as we have to go on certain method, consistent method of doing that. So every time you originate a loan, you have certain capture of the cost related to that. So that is the reason for that.

I was going to say -- so can you give us a sense as to why there were more loans produced in the second quarter than the first quarter? Because as far as growth goes, you actually had less growth during the quarter, which I am not complaining about. I am wondering what is behind that.

First of all, the second-quarter number is exactly -- almost exactly the same as the first quarter. In second quarter, I guess there's a lot of commercial loans being renewed. Every time it is renewed based on the definition of FASB 91, it is considered origination. And frankly, that -- a lot of small loans being done in the quarter.

Then, you have mentioned over the last few quarters that you have been able to improve the granularity of the loan portfolio, meaning more loans or lower average loan balance. Do you have any of those statistics with you?

Walt, do you have statistics?

Average loan size.

I do not have them handy. I think that it stayed roughly static in terms of average loan size.

Compared to the prior quarter?

Right.

Compared to the year-ago period, has it improved a little bit? I think that is what I had heard last time.

No, I don't think I ever was saying that before. Because frankly speaking, when we do loans, we look at the quality more than we look at the size. And today, average loan size actually less than $1 million per loan, right? What can one loan for less than $1 million is a bank? So it is kind of a situation that may I respectfully say it's pretty much a textbook wish list type of thing for us.

Our average real estate loan is about $2 million. Our average construction loan is about a little bit over $3 million that stays fairly consistent. Then, in the C&I side, it is about $0.5 million each that stays fairly consistent. Like Li said, even if you wanted to do a single-family construction loan in Southern California, you are going to be hard pressed to keep it under $1 million these days in any kind of an area, especially in the infield areas in L.A. So we have been actually fairly consistent.

That is actually a good segue into my last question, which is on the -- in the construction portfolio, since that seems to be a hot topic this quarter, can you talk to us about what the breakdown is and update us on that? How much of it is commercial construction? How much of it is residential construction? And then also loan to value statistics if you have--?

Okay, other construction, roughly two-thirds of it is residential and one-third is commercial. Out of the two-thirds of the residential, roughly more than 75% I think is probably 80% is really in town or infield inlets, meaning the infield townhomes or condominiums. And traditionally, that represents our main line of business. And also, we feel that is one of the safest segments of the home construction loans.

Whereas on the other one-third of the area, part of it is also single-family home that was in the infield area. So what is representing the construction loan on the typical track on financing is probably a very less percentage, less than 10% of total number.

Most of it is really in L.A. County and close right around L.A. County. We're not sure much outside of that. Our average loan to value in our construction portfolio is about 61%.

61%? Has there been any movement in the loan to value? In other words, if you look back six months ago, was it in the 50s? I think everybody's is migrating up a little bit as land values decline. But could you give us a sense for how that's migrated?

It went from 60 to 61.

So technically, I'm still accurate but not meaningful. And in terms of extension on credits within that portfolio, projects that are going longer than expected, have you seen anything that is notable there that we should be aware of?

Well, at this point in time as we said in the summation of the notes, we do not see anything that would trouble us at this point in time.

That's true, [faster].

So we're still very happy about it. If you remember, ever since the third quarter of last year, we will be telling you that we have lowered effective loan to value ratio on the new projects to roughly 65% -- was always been holding on pretty much to that. So because our own kind of doing of that at this point in time, we do not see anything that scares us yet.

So you are not seeing -- most of your projects are infield products and they are being completed and sold in the timeframe that you expected them to be done?

I don't expect them to be in the right situation on that. Because as you know, in a general housing slowdown, everything is slightly slower than the builders themselves expected. But so far, we do not have anybody that is a problem loan area [tax].

Even in the good times, there's delays. Li and I were just talking about a project that we have that should be wrapped up within the next two weeks. This is one of only two small projects; we're talking under $5 million. Just to give you a flavor, this is a condo conversion in San Diego. The price points are above where even our appraised price was. And so theoretically that's the troubled area. And we take it that it has weaknesses.

But here's an instance with the proper pricing and pre-sales levels we fortunately are seeing reasonably and actually excellent activity in terms of the sales levels there. But again, we do not much in that area. But it just comes to mind because Li and I were talking about it about one-half hour before the meeting.

So you are suggesting that some of these things are going longer than you originally thought they would and originally what the contracts for the loans suggested and so forth. But it is not --

I would not read into that putting it that way. You're putting words into my mouth. But generally speaking, as you can see, the entire industry is having to slow down. So the speed of setting the units or reassembling the property, it seems to be longer than 2006. And certainly, it takes a longer time to sell than last year or even year before. And that is probably the general trend.

But generally speaking, when we do a construction loan, we give enough time for the builder to complete and finish the loan and then sell the units. And so far, we have our customers still staying within the time limitation.

We have nothing right now where somebody's coming to us saying, "I've got a problem. I am not selling my units or they are selling far below what I thought they are worth and you need to work with me." We have not had -- knock on wood -- that conversation yet.

That is really good to hear. So I won't even ask my next follow-up question then. Thank you very much for your time and congratulations on being able to get around a tough time in the construction.

Thank you, sir.

Joe Morford, RBC Capital Markets.

A couple of questions, it looks like in the mix this quarter on the loan growth, it was largely construction but pretty steady lines in commercial real estate and trade finance. Do you see the same mix going forward through the balance of the year or do you see the growth in construction slowing at all based on what you have got with new commitments?

We see that from the new pipeline base of situation, it seems to be the construction loan is slowing down, especially on the housing side of it. In other words, there is a bigger decrease of pipeline early indication because pipeline does change. Early indication is that construction loan for the housing is slower than before. However, construction loan requests for the commercial sites is heavier than before. The net is probably a small difference.

And on the CRE side and the C&I side, we just make it a continuous effort to try to get them and do them. And whenever we can find them in the type of quality or the rate we can do it, we just go ahead and do it.

Speaking of this, when I was down recently, we were talking. You gave some anecdotes of some pretty aggressive pricing in the market on commercial real estate. Are you still seeing some of that? And related to that, did you see outsized paydowns at all in the quarter?

The pricing is still very, very tough in pricing competition on the commercial side of that, largely because it seems to be now it is a new favorite for every bank. This is the new favorite type of an activity for every bank. So the pricing is tough. We find out that we have to turn over more stones to get more loans.

Lastly, did you end up doing any share buybacks in the quarter? What's your thought about (multiple speakers)?

We're still in the lock-up period.

Still in the lock-up.

We haven't got out of window. Ever since we announced it, we have been in the window; we cannot trade.

You did as opposed to --

3 days later, we will be able to start to thinking about doing something now.

Would that be something you look into doing at this point in the quarter or I mean--?

Well, it has always been that first of all that we really cannot that clear. But I guess when the price is right, something should be done. And it represents a good investment for our shareholders and that was the purpose anyway. But if the price is not right or we think the situation will change that we certainly would time our repurchases, not do it all in one shot.

Great, thanks so much.

Thank you.

(OPERATOR INSTRUCTIONS). [Terry Mortise], Sandler O'Neill Asset Management.

I have a couple of quick questions. I guess the first one, Li, is, could you give us an update on your plans? I know three years ago in January of '05 when you guys did the IPO, you talked about committing to stay on for at least three years. As January of '08 approaches, could you just give us an update on if there is any on your plans or the Board's plans?

Well Board has generally asked me to not making February 15, 2008 as my deadline of quitting Preferred Bank. And so I have complied to their wish. However, I have not given them a commitment of when or how much I want to extend. I am afraid that if I say something, you are going to hold me to it next time. At my age, I don't want to be hold by anybody.

I presume the easiest way to say it; you will see me probably in the bank for a period of time until a) I can no longer handle it or b) I am doing a bad job and should be kicked out (multiple speakers) --

I don't think we have to worry about that.

Thank you.

Just two other quick questions, they're not big numbers but on the fee lines, deposit fees were down and a little bit lower than they have been in a while. And trade finance fees were up and quite a bit higher than they have been in a while. Can you just comment if there is anything special going on in either one of those lines?

I can comment on the first one and more specifically the second one in a little bit more general way. Deposit fee was down is that generally speaking, most of our customers ever since the Internet banking come into play, they're able to manage their funds so much better by transferring the fund into the DDA account to cover the service charges.

You see most of our customers -- we hardly have any sub charges, anything like that. We do business banking. The kind of customer we have generally keep a large DDA account. So one of the things come into the play, these guys are doing such a good job of moving their money around that we see our fees being held back and continuously being -- how should I say, should I say on the lower level than before.

I presume with the new products such as merchant capture, such as the debit card situation, all these situations will tend to move the money faster and will cause the fee even lower in going to the future, although we hope not by much for our case.

In the second case of the [LC] fee and so on, international income, I think we just -- in the second quarter, we have couple of large LC issued. And they were collecting a [standard] LC fee. Another one is we have a lot purchase order from one of our customers. So it would represent to certain degree is a seasonal situation. Certainly, we hope it will continue. But customers call the shots whether they want to do LC or not. Nowadays, LC is harder to come by because most of the purchases from the suppliers is on open accounts now.

Good quarter, thanks again.

Gentlemen, at this time, we have no additional questions in the queue. We will turn the conference over to you for any closing remarks.

Well thank you very much for your interest in us. And we are glad we have a good quarter. We hope to continue doing this way. Thank you.

Thank you, management. Ladies and gentlemen, at this time, we will conclude today's teleconference. We do thank you for your participation on the program.

As a reminder, today's conference call will be in replay beginning today at 5 PM Mountain Standard Time, 7 PM Eastern Standard Time until July 27, 2007 at midnight. If you would like to listen to a replay of that conference call, please dial 1-800-405-2236 or 303-590-3000 with an access code of 11093423. (Repeat replay information.)

We thank you for your participation on today's program. At this time, we will conclude. You may now disconnect and please have a pleasant afternoon.