Preferred Bank (PFBC) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Preferred Bank third-quarter 2007 conference call. At this time, all participants are in a listen-only mode (Operator Instructions). As a reminder, this conference is being recorded today, Thursday, October 18, 2007. I would now like to turn the conference over to Mr. 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, 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 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 management. 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 the 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, thank you Lasse. Ladies and gentlemen, I'm pleased to report that the third-quarter 2007 Preferred Bank registered record earning of $7.2 million, which is $0.60 per diluted shares. In this quarter we choose to write down a corporate bond issued by [Ford Corporation] and the net effect of that roughly is $139,000 of net income effect.

And, without that, we would be -- our net income would be $0.686 or $0.69. Now, we all know that the Federal Reserve board that has decreased the interest rate and the 50-basis point rate cut has effectively affected Preferred Bank's future earnings as we are asset sensitive.

And we estimate that the effect will be roughly $0.035 to $0.04 for the fourth quarter of 2007 and $0.015 to $0.02 for the first quarter of 2008. After that, there should be no material effect because our liability side, our key CDs average life is a little bit over four month's period of time. We will feel all the adjustments will be handled within the first two quarters.

We have just received a report from the FDIC on their examination of the Preferred Bank. And the report confirms their verbal discussion with us as I outlined in our press release. And we're very pleased with the result that of this examination that resulted in no downgrades of our intended classification and confirmed the reasonableness of our reserve methodology and reserve amount. And we will continue to be highly comfortable with our underwriting practice and underwriting standards.

Now, another matter to report is an earlier press release that Walt Duchanin, our Chief Credit Officer decided to leave us. And the bank is going to miss him. And I'm going to miss him the most. You know, after 16 years, we learned to see each other almost every day in the working days and you know, we do have to make adjustments to the effect.

But rather than I say anything other than wish him the best of the best and I would like him to use his own words telling you about this. This is unrehearsed.

Thanks, Li. Ladies and gentleman, I have a family health issue that has become apparent to me. In this last year that I really need to be closer to home. I don't know if you are aware that for the last 16 years I've driven 52 miles each way to work. But the situation has become so apparent to me that I needed to serious consider seriously consider being closer.

So, an opportunity has come up where I will be very close and I've chosen with great sadness for the same reasons Li has indicated to make a decision to leave the bank. But I think the bank is in great shape and it just -- really appreciate it (multiple speakers)

You are not supposed to say that.

Why (multiple speakers)

In the press release (multiple speakers)

That's okay.

Anyways, okay, now we are ready for your questions.

(Operator Instructions). James Abbott, FBR Capital Markets.

This is Dave Rochester here. Walt, just to start off here, sorry to hear about the health issue and we're definitely sorry to see you go and we wish you well.

Just real quick, touching on credit, I wanted to drill down into the 8.4 million MPA that came on. I would assume this was underwritten in July 2006? The date of your original appraisal?

Yes.

Could you maybe provide some color on how many units are in this development, the type of community -- higher-end, lower-end -- I would imagine probably mid- to higher-end. Any details there you can provide?

Walt, you want to do that?

Yes, it's a development that has a completed single-family residence that is high-end, over 4000 square feet and overlooks the bay and an adjoining seven lots that are entitled in a parcel that is lower down that is currently zoned for I believe 38 PUD. So it's considered to be in a desirable area of the Oakland Hills.

And any sense -- I'm sure you know how many of those lots have already sold or are they still being developed and haven't been sold at this point?

They have not been sold.

Okay and there have been no sales on this entire development at this point?

No.

Could you comment on what the interest reserve was that was built into this loan when it was underwritten? I would assume that the loan has probably maxed that out at this point. But just wanted to get some color there.

Actually Dave, it was not maxed out. There's still -- we still had plenty of interest reserve left. However, what happened was there was a lack of progress in terms of getting the entitlements done. We had also insisted on an interim paydown which had not materialized. And for both of those reasons, we took action on the loan and put it on a nonperforming status.

Okay. Maybe can you provide a little color on what happened with the appraisal process? How did this decline so precipitously over maybe a little over a year and a half? It looks like it came down maybe roughly 50%.

The original appraisal was appraising the unentitled lots -- and the 38 PUD at a price as it is entitled to pay and because it is zoned and entitled for 38 units. But in the meantime, that the developers try to get higher density out of the space was in the process of applying for higher density. Appraisal took a 38-units PUD type of appraisal as entitled.

And, during the period that we were making the loan, little progress was made by the developer. They are so busy in their deals in the in the inland Empire Palm Springs area, many of the project turns out to be unsuccessful in the area. They have put no attention, no work in this particular project and entitlement progress is minimal.

And that's one of the reasons why we decided to foreclose it. Net interest reserve will carry them for -- at the time of foreclosure will probably carry them for another half a year.

And Dave, the other thing is, is that this is not a precipitous drop in the market value. When the appraisal was done, like Li said, they made the assumption -- which is not atypical when you are looking at this type of loan -- of the people progressing on and being successful in the entitlement and the appraiser did check with the powers that be and the city and county and it was eminently feasible. But the problem is now when you're looking at it and those efforts have not gone forward, you're just looking at it as is and so it's a different -- somewhat of an apples to oranges.

So therefore, when you do these kinds of loans, you try to keep the loan values low simply because these things do occasionally happen and did happen in this particular case. But the overall values of the Bay Area have not cratered. You're not talking for example, the (inaudible) valley.

Right, right. So, it sounds like you've got another six months on the reserve. Was it originally 12 months, the interest reserve?

It was originally about 18 months.

18 months. Okay.

So we just choose to do it and we reverse the reserve, we just -- we are not earning interest on this one.

You know that's actually -- brings me to another good point. Was there any material interest reversal that should come out of this, out of the quarter, out of the margin this quarter?

No.

So I guess since you guys did not provide your -- you're at this point, you have a decent comfort level that this appraisal won't be cut anymore. It looks like at this point the LTV is roughly 90%.

We certainly will hope that there will be no further loss in value. And we like to think based on current events -- as of today we're still pretty comfortable with the value. But, going forward, we obviously would do periodic appraisal on this particular property and to the extent, a required reduction in value, we do accordingly.

Could you give us a little color on the guarantors -- what's their financial position overall size, leverage? And have you done business with these guys pretty extensively previously?

At the time we were making loan, these people having a pretty big name and then they many developed and they're very famous, especially in the Palm Springs area. And I cannot go ahead and give you the exact number of their net worth. All I can say is quite substantial at the time when they make the application, their net worth is many times the loan amount. And obviously, the bank will be using all the possible avenues to try to recover our losses if any from the guarantor.

So, they are involved in a number of other projects?

Involved in many many projects and [pumps]. In fact, as I stated earlier, it is the Palm Springs -- how should I say -- setbacks that lead them to make little progress on this one.

Right, right. So I would imagine that they are pretty heavily levered at this point. If they have a number of projects going on down there and we know what's going on in that area in terms of really low absorption rate, they are probably -- a decent assumption that they are pretty extended at this point?

Well, we do not know what's their exact situation at this point in time. All this will be find out through the investigation process and any legal action that we are pursuing. And I like to say if I had to guess, they are extended. And that is one of the reasons that we feel that they are making no progresses in this particular project.

We sort of like call the loan and make it on a noncore status and much earlier than the expiration date of the loan. So, we decided that we probably are not putting enough resources -- not going to put the resources in this project. Therefore we call the loan.

Okay and, this is the only project you have with these guys?

Yes.

Just another quick question on just your reserve methodology. It -- are there any LTV triggers beyond which you would automatically assign a specific reserve to a project? It looks like this one is at a 90% LTV. You didn't provision for it. With the new appraisal is -- do you have a 95% or 100% LTV trigger? Can you tell us how you think about that?

Walt, you want to answer that one?

That's a good question, Dave. It's -- if you have -- I think that we would look at doing additional reserves in the circumstance where for example, you would have a high loan-to-value and the sub market is plunging. There, I think it's appropriate to look at putting on an additional reserve.

And real quick, I know I'm taking up a lot of your time here. I'm sorry about that. Just on the construction growth, it looked pretty robust. Can you talk about the mix there, residential versus commercial and where that growth was?

Well, actually, in the recent months -- actually even started sometime in the late spring time, we have slowed down our new loans on the residential side. And other than the fact we have made tighten our underwriting standard on the residential side, we are pursuing a lot more commercial construction loans these days as compared to the residential construction loans.

And one last thing real quick. I skipped over this one. In terms of -- just looking at the LTVs in your portfolio, could you comment on the residential construction side, what the average LTV is of that portfolio and if you could comment on the amount of loans that are at a 90% LTV or higher at this point?

At this point in time, based on the most recent internal inquiry on the matter, we do not have -- we have one project. Walt, why don't you (inaudible) that. You are more closer than I am on this one.

Right. We actually have you know, one project that we -- there's two types of LTV. There is a bulk LTV and a retail LTV. And according to regulatory standards, we now have two in that category and excluding the LTV. And so, (multiple speakers)

Excluding LTV builder. Excluding this non-accrual loan. Okay, okay?

And so, those are -- one is a function where -- these are relatively smaller loans. We're talking an aggregate combined of probably less than 8 million. One is in the process of actually hopefully being closed out by the end of the year on a bulk purchase. And the other one is a project in the central valley where we actually have a very strong guarantor. And although it's moving slowly, he is also supporting it by actually paying it down out of pocket. So, those are our two instances there.

Actually, that one is not up to 90%, lower than 90%, close to 90%. All the other situations we do not see any 90% situation in it. The earlier ones you mentioned about the one that's being closed out, it is one of the participation loans, participated with other people where the national examiner from FDIC have made examination and issued his report and determined there are no loss on this particular loan.

Joe Morford, RBC Capital Markets.

To you, Walt, too I pass on my best wishes.

I guess a lot of my questions have been answered. But just a couple of random follow-ups. First, can you just talk about kind of the workout plan for this one credit? Are you trying to move to foreclosure and did I hear somewhere along the way there was risks that the borrower may file for bankruptcy or something like that?

The filer did file bankruptcy. And we have obtained the motion for relief. And if nothing is going wrong, we should be owning the property by sometime in late January or early February. And we plan to liquidate that one house and the seven lots.

And then, with regard to the -- that parcel that is -- needs to be entitled, the most logical way is probably seems to get entitled first. And we're finding different avenues to see how we can find some professional helps that work with us together either by joining forces or whatever to get these things done and get us out of it.

That's helpful. Also, on the construction, you talked about even starting as early as late spring, kind of slowing on the residential side. Do you see this portfolio actually plateauing at some point here or perhaps even the balances start to decline a bit?

If I had to make a guess, one of the situations we internally talk about, there are some project still coming in is very worthwhile which you have real low loan-to-value ratio in a real good area by real experienced people and good sponsorship. And certainly, those are the things we're willing to consider that and we will continue to do it if it meets all the criteria we set.

Having said that, we believe that with accelerated paydowns of our current construction loan portfolio as I indicated in the press release and probably that discussion we have had, that there has been a slowdown in paying off the loans on the completed units by our construction borrowers because of credit meltdown happened in late July and early August in last year; at least the end of September.

But we anticipate the paydown on the aspect will be accelerating and while the new loan additions -- new pipeline is going to be slowing down, we think that's going to plateauing very soon.

Okay. That's fair enough. And lastly, you talked about I think relatively short maturity on your CDs, just how successfully you have been able to kind of pass on the lower deposits -- pass on lower deposit rates following the Fed cut?

Well we -- to tell you the truth of the situation, we have -- we are amazed that we're able to keep a lot of the customers at the current rate. Let me give you some comparisons.

We are in Los Angeles, we see paper from Countrywide on everyday quarter page in Los Angeles Times and (inaudible) probably another quarter page on Los Angeles Times. And then, the rate was published as of today for a six months TCD and Countrywide posting 570. And for their money market rate they post 550 which puts a lot of pressure on all the banks.

And as we're conscientiously still try to limit ourselves our deposit rate to hopefully that not any higher than the Fed fund rate, okay. And we just find our relationship customer keep on renewing with us and the newer ones slowly coming in. And we are willing to wait for a while when the market is more stabilized before we get more TCD deposits rate on the situation.

So, we consider ourselves lucky this time for two reasons. First of all, we're still having the type of deposits we have at the rate we're giving. And another situation is that we had a very good margin between our loans and deposits at the beginning of the year. We're able to use part of it.

Makes sense; thanks, Li.

Aaron Deer, Sandler O'Neill & Partners.

I guess I'm just following up on the deposit discussion. Can you talk a little bit about the deposit trends that you've had particularly in non-interest-bearing deposits? I think in the release you mentioned that maybe they were flat but I wasn't sure if maybe they might have been down a little bit. And what's driving that if there's any specialty deposits in there, can you refresh us what's going on there?

Preferred Bank has no specialty deposits. We don't have extra money. We don't have title money, we don't have bankruptcy money. We just don't have anything in that particular area. And I'll -- demand deposits coming down. You know, we were wondering about the same situation. The best we can determine here is, all our customers start to get smarter and smarter.

They've been moving money because using the Internet they've been moving that to the interest-bearing accounts, the money markets on the other interest-bearing deposits. So, while we're not seeing that area having growth, we're seeing some growth in the interest-bearing core deposits.

Okay, fair enough. And then, can you explain the classification change that the FDIC did on the commercial real estate's construction? What type of property was that?

Well, first-hand discussion would be better coming from Walt, okay?

Sure. It's centered around land loans. We have consistently, over the years where we have had a land development loan where you're building the off-sites and doing things with the land, we have consistently labeled that as a construction loan.

But, we've had other loans where there's land loans where owners have obtained financing and they've -- just to hold on and maybe do explore various uses and just hang onto it for a period of time. We've put that into a -- to get sort of technical -- we've put that into the call code category of non-residential, nonagricultural.

And we've been audited and examined and nobody has had an issue with that. This time around, they've said you know what, it's more appropriate that that be put into the construction land development category. And so, we moved about 50 million as of September 30 into what now looks like construction but actually includes that other category. So we've expanded our category in more of what they felt was a conforming with CAR report standards.

That's helpful. And how much is the outstanding total on land loans at this point?

I believe about -- on just those land loans by themselves without (inaudible) would that be --? Let me get back to you on that with a better number. I just don't have it here in front of me with a more accurate number.

Don Worthington, Howe Barnes Hoefer & Arnett.

As with everyone else, I would like to express my best wishes to you, Walt, as you move forward. A couple of things. One on the forward corporate bond; what is the outstanding balance on that now?

Now the outstanding balance is just under about one million, 153, okay?

And then in terms of the guidance on the impact of the Fed rate cut, I just want to confirm, that assumes the Fed does nothing else subsequent.

Yes, obviously.

So that if there were another rate cut, it would take you a little longer to process that through as well?

Obviously.

Okay. And then, I guess in terms of -- we've talked a little bit about the construction lending. Are you seeing any weakness at all in the Los Angeles market in terms of residential construction?

Yes, there's a whole lot of weaknesses over here. We see across the board many -- most of the loans that we start to see people listing their selling price lower than the original appraisal price. And the sampling that we have find right now for our loans is basically some of the loans is between 5 to 10% lower than the appraisal price. But, there are also exceptions.

At the very high end of it, such as we have a -- just completed units -- you have complex in prime Beverly Hills, they're listing the property actually for 12 to 14% higher than the appraisal price and the sales have been very good; I mean, 10 units in about two weeks period of time.

So, it is not necessary that in the inferior area [is] universal. As you probably know, nearly 75 to 80% of our housing construction will only be more attached units [inferior] units and basically in the mature [inferior] area. And generally in these areas, the price reduction will have you or the market -- the value reduction is much more milder than what people start to read in the outskirts area. The track home type of product.

Manuel Ramierz, Keefe, Bruyette & Woods.

I was wondering just to clarify on the margin, the margin impact -- I thank you very much for putting that in. Was that cumulative or was that in each quarter?

The $0.06 -- roughly $0.06 is in each quarter.

That's in each --?

In other words, if I have to anticipate the first quarter will be $0.035 to $0.4 less than in the fourth quarter. It's another $0.015 to $0.020 in the following quarter.

And then, just on credit, do you have a formal process in place to try to get ahead of the market and kind of anticipate which loans that are performing now might have problems because of falling home values and falling --?

We're constantly looking at that. As a matter of fact, we have -- periodically get together and review almost every construction loans that we could make or review on each of them and then study the most recent market listing and the sales numbers among all of us. So, the next meeting will be scheduled for next week.

Okay so you are -- that would be across the entire portfolio?

Yes.

And what is actually triggering new appraisals? What sort of information would get you to do that even on something that is progressing as planned but you are a little bit worried about the [excess strategy]?

Let's say that there is no -- how should I say -- no necessary absolute science on that. But generally speaking that if we fear that the project has been sitting there for too long or not being sold and then no action about it and then when we look at the listing price is getting further downward or the give away is getting even further big and nothing happen then, we want to do more additional appraisal on these properties.

Great. Well, thank you and best wishes to you, Walt.

(Operator Instructions). Terry Mortise, Sandler O'Neill & Partners.

My questions were all answered. Thank you.

(Operator Instructions). I'm showing there are no additional questions at this time. Please continue with any closing remarks.

Thank you very much and appreciate your attention. Thank you. Bye-bye.

Ladies and gentlemen, that does conclude today's Preferred Bank third-quarter 2007 conference call. Thank you for your participation. You may now disconnect.