Preferred Bank (PFBC) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by and welcome to the Preferred Bank Fourth Quarter 2007 Conference Call. During today's presentation, all parties will be in a listen-only mode, and following the presentation the conference will be open for a question-and-answer session. As a reminder, this conference call is being recorded Thursday, January 24th of 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, 2007.

With us today from management are Mr. Li Yu, Chairman, President, and Chief Executive 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 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 like to turn the call over to Mr. Li Yu. Mr. Yu?

Thank you. Good afternoon. I am reporting for the year 2007. Preferred Bank earned a total of $26.5 million, or $2.50 a share, and we see growth in assets, loan, and deposits in all aspects.

In the fourth quarter we are facing with a downside credit cycle right now because of larger loan loss provision to increase from previous year's level of $700,000 to $2.9 million. We are recording $0.57, or actually 8.1% decrease from the prior year.

Total deposits increased slightly, total loans increased slightly and our net interest margin, despite the Federal Reserve rate cut of 1% during the fourth quarter -- during the third and fourth quarter -- is holding at 4.82%, which is right along with our expectations.

As most of you are more than keenly aware of our country is under, especially in the California area, that we do have housing-related market slump and also credit market meltdown. That has resulted in slow sales and losing in value. We, as a bank, although do not loan to subprime mortgage, we don't do any mortgage or home equity lending at all, but we are involved in certain degree with the home construction loans. Roughly, 20% actually is less than 20%, our total loan portfolio is relating to housing construction, and it has been decreasing from the third quarter balance.

Although we expect to continue decrease in the future, and we have seen no sign that the market will improve much in the ensuing few months, and we are hopeful that the most recent severe rate cuts by the federal government will make a difference in the marketplace and therefore put most of the situation in good shape.

So with that, we will be approaching our business very carefully. Now I am opening for questions.

Thank you, sir. (Operator Instructions) One moment, please, for the first question. Joe Morford, RBC Capital Markets.

Hi, this is actually Meg Keene from Joe's team calling. Good afternoon. We just wanted to ask about the increase in non-accrual loans this quarter and just if you could give us some more detail about where they were at and the number of credits.

Okay. Let me tell you this -- there's two loans to place in non-accrual. Please understand my explanation carefully for this press release. One of them is a real estate loan; one of them is a C&I loan. Let me address the C&I loan first. It's roughly $6 million that we are participating with another bank in the local area. The loan has been written for a 9-year period, and since last year, it began to show some weaknesses and appropriate reserve was provided.

And this year, finally, that it become non-interest paying over 90 days, so we placed it at non-accrual. We have fairly good knowledge about the loan. The loan is secured by real estate and by other assets of sufficient value that impairment is easily measurable, and we are fairly confident about impairment relating to this particular loan.

Now, another loan is a $12 million, is a land loan, which we participated with another bank. Now, please note, as of December 31, even up to January the 7th, the loan was performing. It was performing as usual. But in mid-January we have noticed that the lead bank is telling us they spotted a weakness on that particular loan and as of yesterday, as of yesterday, they notified us they have placed this loan into non-accrual. So we quickly, for this press release and back dating for the December 31 financial statement, we are putting this loan as non-accrual and provided reserve.

Now, the loan to appraised value, the last we know, is a little bit less than 50%.

Great, thanks so much.

Aaron Deer, Sandler O'Neill.

I guess, first of all, on these loans, can you tell me how much of your portfolio are participations that were originated by other banks?

Roughly, the net participation is roughly 13%, and it changes from time to time. The last we measured it was about 13%.

Okay, and of these -- in the case of this real estate and the CNI loan that are participation, what -- there are $12 million and the $6 million -- those are -- that's the value on your books, or that's the total loan value?

Oh, that's the value on our books. The real estate loan, the total loan on the total credit by participating with several banks altogether is in the $60 million to $70 million range. On the commercial loan that the total loan amount for the credit is like $23 million, which we have $6 million for (inaudible).

And then, I guess, more generally on the credit front, what kind of trends are you seeing in terms of past dues?

As of December 31, we have a $1.6 million technical past due, and then $200,000 technical past due on our book -- two loans. These two loans is basically customer is out of town, and then on vacation, and they have not signed the loan document in time. It was quickly restored as not 30 days past due in January as of now. So, as of today, I am reporting to you we have no past due loans.

Okay, so it's just the NPAs that you have reported, basically?

That's right, that's the NPA we are reporting.

Okay, and then last week -- I was just wondering if you could give some thoughts on the margin. How much of the decline that we saw this quarter is related to moves by the Federal Reserve and the impact that that's had on the prime rate versus any -- I'm sorry -- any interest that's been put back as a result of these non-accruals?

The interest put back is somewhere around in the 100,000 -- no, no, one is $88,000. The other one in the first quarter we have done it is about -- because we did it in the fairly early stage in the quarter is reversal is about in the $90,000 range. However, since third quarter that -- in the first quarter we did it early. The last two months we didn't have any earnings on that particular credit, also. So there has been -- this is what the reversal (inaudible).

Now, on the net interest margin side of it, Federal Reserve rate cut is also presenting, obviously, the contracting amount to our net interest margin. If you remember, in the third quarter press release, we had put in our press release is that to our best estimate for the $0.50 rate cut that was happening in the last few days of September, the effect to our net income is roughly $0.04 for the first ensuing quarter and $0.02 for the subsequent quarter. And afterwards we expect no effect or maybe some slight gaining effects.

The reason is that we have a very short deposit portfolio -- duration deposit portfolio. The TCD maturity is 4.1 months, and on our asset side is a number of assets is having a floor that is still effective will give us the protection for [period of] time.

So it is hard to measure what the effort of the -- decide the net interest margin is other moving factor such as total asset size and asset shift involved in that. It is hard to measure the net interest margin, but the net effect to the net income, as I indicated to you.

Now, obviously, that we're facing was another rate cut just announced that will be negative effect on our earnings.

Okay, then, if I may, just one more with respect to the deposits. Have you found that as your CDs are maturing, that you're able to price those down pretty meaningfully, or is the competition still aggressive enough that those are oftentimes just kind of carrying over at [similar rates].

December, in the fourth quarter, the competition is very, very high, and we conscientiously do two things. Number one, we are not try to do too many CDs because just a piece of information -- in the last months of December, even B of A was posting three months TCD at the rate of 5.20, and we don't have any TCD in our book over 12.6 at the time.

So we are sort of like just hold onto to our relationship deposits, and then, alternatively, we try to borrow from Federal Home Loan Bank, which is a much lower source of the cost of situation, so we switch our funding, although we are still having our loan-to-deposit ratio less than 100%, but our funding sources, which, from our TCDs to Federal Home Loan Bank funding.

Now, we are not fully aware of, at this point in time, what our competition offering on the interest rate right now as of just -- as the action of Federal Reserve Bank just happened, but we don't expect that we will change our own discipline much.

Chris Stulpin, D.A. Davidson.

How many shares did you buy back during the quarter, please?

During the quarter we bought back 400,000 shares. At the end of the third quarter, we have bought back 100,000 shares. So we have bought back 500,000 shares, and we still have room to buy back additional $5 million worth of stock is approved.

Don Worthington, Howe Barnes Hoefer Arnett.

I just wanted to follow up on the REO. I guess last quarter it was the property in Oakland Hills that was non-performing, and now that's moved into REO.

Yes.

I just wanted to get an update there because, if I recall, there were some guarantees against that particular loan?

Yes, we have used a lawyer to pursue the guarantee, and we have measured the so-called, the damages that we have suffered after calculating the land value and the potential value and adding back interest and all other situations, and we're pursuing the guarantor. Obviously, as usual, the guarantors will be crying that they don't have any assets, this and that, which is a very different situation from their financial statement they have filed with us. Also, they have proceeded to hire the largest law firm in Southern California, one of the largest law firms in the country to defend them. So in that particular process to get from them.

Now, the further situation is that on the REO property that we have foreclosed on, that consists of two parts. The first part is that can be sold within the next few months after we have those legal division of the homeowners' association so long. And there is another part of it is represented land that has entitled loans for 38 units, and we have been advised by very -- which would be the competent sources that they are proceeding to revise the zoning to 105 units, and then try to get entitlement that way.

So we are -- actually, we are hopeful that the whole value will be more than recovered.

(Operator Instructions) At this time, there are no questions. I'd like to turn it back over to management.

Thank you very much and, as I said, we haven't seen the end of the real estate slump in sight. That we'll approach this matter carefully, and we hope that it will be a blessing for all of our people that our market will improve quickly, and many of the time I think the value represents the downward, representing a -- how should I say -- it's more of a shock and more of a temporary shock to many in the situation. But we hope during the next quarter that our picture will be clear in the California economy. Thank you.

Thank you. Ladies and gentlemen, this does conclude the Preferred Bank Fourth Quarter 2007 Conference Call. You may now disconnect, and thank you for using ACT teleconferencing.