Preferred Bank (PFBC) 2011 Q2 法說會逐字稿

Welcome to the Preferred Bank 2011 second quarter conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions) This conference is being recorded today, Wednesday, July 20th, July 20,011. I would now like to turn the conference over to Lasse Glassen, Senior Vice President of Financial Relations for (inaudible).

Thank you. Good day, everyone, and thanks for joining us to discuss Preferred Bank's preliminary results for the second quarter ended June 30, 2011. With us today from management are Mr. Li Yu, Chairman, President and Chief Executive Officer; Ed Czajka, Chief Financial Officer; and Louie Couto, Executive Vice President. 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 document 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'd now like to turn the call over to Mr. Li Yu. Mr. Yu?

Thank you, Lasse. Good afternoon, ladies and gentlemen. I am pleased to report the second quarter 2011 we are reporting a net profit of $1.7 million or $0.13 a share. This is a good improvement on the first quarter, despite the fact that credit costs are still very large at this point in time. Our credit costs include $1.8 million of loan loss provision, and $900,000 value adjustment or write-down of our OREOs. And also we -- during the quarter we also have a $700,000 recovery of loan losses on the loans that sold that -- mostly on the loans that were sold above book value. So for all practical purposes, the total credit cost is about $3.4 million and we reported $1.7 million after these costs. During the quarter we continue to show improvements in overhead control, and also we stabilized our net interest margin. Our core deposits has increased and we also are very encouraged by the activities in loan origination.

Let me give you a little bit of color about the loan originations. For the quarter, we originated $92 million in new loans, of which a little bit over -- a little over 50% is C&I loans. And roughly 35% are owner-occupied commercial real estate loans. Now, needless to say, you all are aware these loans are very highly competitive to get in the marketplace and we are very pleased with our ability to generate that much in these two categories.

Looking over the pipeline, we see the second quarter hopefully to be at least as good as the first quarter, although -- second half as good as the first half, although per quarter, it may not be evenly distributed in the third or fourth quarter. But we are highly encouraged by the pipelines currently that we see. On the deposit side, you notice that we have good increases in non-interest-bearing deposits. We also have good into increases in interest-bearing transactional accounts and small deposits, small TCDs. All of them are considered core deposits. Early indications July, for the first 19 days, these increase trends are still continuing.

We are hopeful for the second quarter -- after the second quarter, for the second half of the year, we continue to have good increases in DBAs in other core deposits.

You all have been reported in the past by us that we are working hard on our NPA disposition of resolution. And we think there is some good activities in the third quarter -- second quarter. We also think that the third quarter and the fourth quarter of activity should continue. And although sometimes the holiday season may delay a little bit in the fourth quarter, but overall, we think the second half of the year we still will show some good results in this particular area. With the continued (inaudible) deduction -- reduction in the non-performing assets, we are seeing our credit cards begin to subsidizing -- subsiding. We think the total credit costs trend is very encouraging at this point in time.

This is especially true that we have just received a share national credit report that shows no adjustment needed by our bank. So, if you remember the last quarter, I had reported to you that there is a wide cut out there for our third quarter profitability is the [snake of share] national credit. Well, that worry no longer exists. So with all the above, we collectively feel that the outlook of the second half of 2011 is positive. Thank you very much. We're ready for your questions.

Thank you, ladies and gentlemen. (Operator Instructions) Our first question is from the line of Aaron Deer with Sandler O'Neill & Partners.

Hi, good afternoon everyone.

Li, congratulations on showing some good numbers this quarter. I know it's been a tough couple of years for you guys. It's very encouraging to see things moving so strongly in the right direction this quarter.

Thank you very much for the kind word.

I guess on the credit front, it sounds like you are confident again that things will continue in the right direction.

Obviously, it doesn't seem likely that you can see the kind of improvement that you saw in the second quarter. But do you have any planned loan sales or anything here in the back half of the year that would help sustain the pace of improvement that you've been showing more recently?

In the future, in the second half, we're looking for some really good OREO sales and we also are actively looking for some loan sales too. Opportunity for loan sales.

Together with some of the credit that maybe so could upgrade it from a nonaccrual status. All of these factors, three factors, still in play right now.

And a lot of them is depend on the economy continue to hold, which we think it should. Now, Louie, you have anything to add now?

Yes, just to echo the words that Mr. Yu has put out, we've seen increased activity and interest in our ORE properties. As you could tell, they're mostly land at this point. And we've seen multiple bids coming in and folks willing to put deposits down and entering into under contract on those.

Obviously, as you pointed out, the law of diminishing returns, it will be difficult to post such high reductions as we reduce the overall number.

But at this point, we don't see the headwinds against us in the future that we had in '09 or 2010 as far as being able to consummate the transactions that we have underway.

Okay. And then in terms of kind of stabilizing and now turning around the franchise, I know you've made a very strong hire that you announced recently to take on the COO roll. I'm wondering if there is other hires planned that can help boost production and refill that pipeline?

Number one is that, obviously the COO that we just add on, that he's currently on vacation. Otherwise he would be here to give you some insight of his plan.

But based on the things that we have collectively working on, we are looking at several of our regions so to add more power to our production staff.

For instance, in Orange County, the region we traditionally were very weak in the lending side and the deposit side has not been as vibrant as other regions.

And our COO has resources, human resources over in that area, and he has a plan to add more people over there.

On the other regions, I've already committed to a couple of new staff and very qualified, very good staff in the deposit side that was scheduled to come in in the second half of the year.

That's great. And then lastly, if I may, any kind of update on the potential recovery of the DTAs later down the road once you've demonstrated several quarters profit by the way? I know it's a long time in the offing. I'm just wondering if you've gotten any updates from your accountants in terms of that?

Ed will answer the question.

Hi, Aaron. That's a great question.

As we've talked about before, we certainly look forward to recovering at least a good portion, at least about 50% of the valuation allowance on the deferred tax asset.

As it stands right now, we had been looking toward the fourth quarter of this year for our ability to take some of that back in.

In my recent discussions with our external independent accountants, it looks as though if trends continue, that we see in quarters one and two, if that continues on into quarter three, we may have the ability as early as next quarter to take some of that back in and start to do it ratably over the next few quarters.

So the outlook there has actually turned a little more positive than it previously was.

Wow, that's great news. Okay, thanks, guys.

Thanks, Aaron.

Thank you. The next question is from the line of Joe Gladue with B. Riley & Co.

Hi. I will add my congratulations as well.

Thank you.

Let me start with, I guess, personnel expenses.

You had a good decrease in personnel expenses, compensation expenses sequentially. Was there anything nonrecurring contributing to that? Or is that a sustainable level?

Good question. I know the answer but I would rather have Ed answer that.

A couple of things. We did have a little bit of a higher cost in quarter one related to FAS 123R.

Joe, as I'm sure you probably know, that relates to the expense we have to book related to restricted share awards, as well as the stock option expense. So that did decline a little bit in Q2.

However, the bigger contributor was really a function of loan production. In terms of our capitalized loan origination costs.

Obviously, as you know, as the origination volume picks up, we get to capitalize more of those origination costs going forward.

The majority of those origination costs are human resource related, so as production picks up, we get to see a better capitalized loan origination cost, which, of course, is a credit to personnel expense.

Okay. I guess just wondering if you could give us a little color there. I guess there was a small amount of loans migrating to nonaccrual.

Just wonder if you could -- what type of loans were they and indicate any particular industry or anything?

Louie, you want to cover that?

Yes. It was predominantly -- the majority of it was one loan actually. It's commercial real estate.

And it was reported as past due 30 to 89, the quarter before. The customer had been struggling and we've been working with him.

But at this point, because we do not believe that they're going to be able to pay all accrued interest and principle, we put the loan on nonaccrual.

It's not an overall trend. It's an isolated case, generally, with that particular loan.

Okay. And, I guess, while I'm on the subject of asset quality, it looks like there was some decline in TDRs. Some of them returned to accruing status or--?

Generally, yes, it was some of that. Some also are paying down a bit.

All right. On the, I guess, balance sheet, still some contraction and just overall asset balances. It looks like both the securities and loans are still declining.

Obviously, still a bad environment for loan growth. But do you expect to continue to contract the balance sheets in the second half of the year?

Well, you have to realize that much of the decline is really a so-called -- a positive decline. Is the reduction of the nonperforming loans.

And also the payoff of some of the sales of some of the OREO. So actually we have not quite made up for the new-loan origination yet.

But, obviously, our plan in the second half of the year, that we will grow the loan portfolio to hopefully the standard of -- by the year in 2010, about the same standard in that time.

This is really, in fact, if we do that, you will see that really the difference is that change of whatever huge amount of nonperforming loan into performing and therefore enhance our profitability.

Another situation is that there's something that we did not tell you before. Traditionally Preferred Bank being a Chinese-based bank, we do a lot of cash-secure loans. In the neighborhood of about $50 million to $70 million, and we have conscientiously reduced the cash secured loans.

The reason is that we make a very little dollar amount of that. And for the accommodation of the customer. And we barely make our costs in doing those kinds of things.

But the net result of having those loans, meaning having the cash secured which you will deposit -- adds our footing and sort of like reduce our capital ratio, which is something that we have done in the past, tried to reduce.

So these are the two factors that really -- we think they're the real essence of total earning assets loan, has been on the increase trend.

Joe, I also want to point out that -- you mentioned loans going down.

They did go down when looking at compared to year end 2010. However, when you looked on a linked quarter basis, we are up about $10 million over March 31st. So wanted to point that out as well. So it's a different trend.

That's true. All right. I guess lastly, I'll ask about the net interest margin.

You're getting a better mix of deposits. And getting rid of a lot of the nonperforming loans and originating a lot more. Is there -- what is the outlook for improving the net interest margin?

Well, it's going to be a function of a couple of things. First off, on a linked-quarter basis, it's down about 6 basis points from 363 to 357. Q1, as you may recall, Joe, was positively impacted by an interest recovery of about $263,000.

So if we strip that out, down about 6 basis points. A couple of things are interesting during the quarter.

As a DDAs continue to grow, which obviously is one of the best trends we can see, our cost of funds went down about 11 basis points on a linked-quarter basis. So that was very positive.

However, what we are seeing in terms of average loan balances is still a bit of a challenge for us.

A lot of that loan growth that we talked about in the second quarter and that production came toward the end of the quarter. So we didn't have the full benefit of having those loans on the books for the entire quarter.

So asset yields were down about 15 basis points because cash balances were up a little bit.

The other thing we did, and I mentioned it in the press release, was we sold about a little over $6 million in municipal securities during the quarter.

Obviously a lot of call has been made on municipalities that have been in the media lately. So we want to try to reduce our exposure there.

So that contributed as well to a little bit of a decline in the asset yields.

But going forward, given what we see in the pipeline, and what we saw in terms of production in Q2 and what we see going forward, I would certainly look for asset yields to come up.

I would continue to look for the cost of funds to come down, but very, very slowly. And so we'd like to think there's going to be some expansion in the margin, maybe to the tune of about 3.75% by the fourth quarter of this year.

All right, that's all I had. Thank you.

Thank you. The next question is from the line of Julianna Balicka with KBW.

Good afternoon.

Hello.

Hello, how are you?

Good.

I have a couple of follow-up questions, if I may.

One thing I'd like to start thinking about with you guys, given the positive trends that you are seeing in credit and resolution, is looking at your allowance and kind of your charge-offs are staying consistent. You're working down your nonaccruals.

How can we start proactively thinking about the level of reserves that you will have saved by year end and also by the year end of 2012?

I know regulators are not likely to be very happy with banks that are releasing reserves too quickly. And you guys are not one of them, but others are. So I was kind of thinking if you could just talk us through the logic of how that is going to work.

One of the things that I can say is that let's assume we're lucky enough -- let's say that we're lucky enough and we have lot of resolution between now and the year end. And which result in a lot of release of the reserve or reduction in nonperforming assets.

We may have over-reserve situation happening in that case. And if so, as long as our accountants make us do that, we probably won't release any of the reserve between now and then.

So you will? You will be more conservative and keep your reserves as much as you possibly can until everything is just completely out of the woods?

Yes. And also you have to notice that our accountants may take a different viewpoint at the year end, and make us -- force us to do something and then we're helpless.

Well, that's always great when you have accountants versus regulators.

Yes. And I think also, Julianna, looking at that going forward, there's certainly the ability to grow into the reserve. The level that we have in terms of growth going forward.

Probably in 2012, and maybe not taking provisions that would otherwise -- we otherwise would take on a normalized basis.

That make sense. And in terms of the loan growth that you are looking at, how should we be thinking about the increase, the reserves that will -- not reserves, excuse me, the increase to expenses that will arise out of just the investments you are going to have to make in the infrastructure and in the talent that you're going to be hiring?

Versus when the commitment that these lenders are going to be able to obtain will translate into outstandings and things like that?

I like to think the hiring of the talents is not as significant as revitalizing our current talents. Most of the current officers are being handed a duty of resolving troubled loans.

And as these things are reducing, they will now have the free time to go out, chase for new credit. And which is something, in essence, is like a dry powder situation. But we do -- strategically will be adding several area of people, as I previously answer to in that in certain area we feel we are inadequate.

Okay. That makes sense. And then my final question on a different topic, Ed, what kind of securities are you buying right now?

I haven't bought anything in, gosh, probably four or five months.

What I'd like to think is going to happen, Julianna, over the next 12 to 18 months, is we'll see a slow shift in the asset mix and the balance sheet, potentially away from securities. I think the securities portfolio has peaked out in terms of balances.

Obviously to the extent we've got a strong pipeline and we've got a lot of cash on the balance sheet, we can use the cash and then perhaps eventually use some security sales to fund the additional asset growth.

As well, obviously, as continued deposit growth. So haven't bought anything.

Okay, very good. Excellent. Thank you very much for taking my questions. Excellent.

Thank you, Julianna.

Thanks, Julianna.

Thank you.

The next question is from the line of Joe Stieven with Stieven Capital Advisors.

First of all, good afternoon. And again, very good quarter. Most of my questions have been answered or asked.

But I will ask this one now. You guys obviously still have the consent order, but you are substantially ahead of all but consent order requirements. Can you give us a timeframe of when the regulators are going to come back and look at this? Because that's sort of my -- that's it.

I would defer that question to the person that in our staff the most familiar with regulator action, which is Louie Couto. Louie, would you want to answer that?

Yes. Generally the regulators will require the completion of the full-scope examination before they make any determination on the termination of an enforcement action.

We're not scheduled for another full scope examination until the first quarter of 2012. And so at the earliest it would have to be a short period after that.

Now didn't the head of the FDIC recently say that in companies that made significant progress raising capital, et cetera, that they would actually do things prior to the schedule of a full-scope exam?

They did, but, of course, these decisions tend to be made in a local manner. Certainly, we will have open communications with our field office and regional office about the situation.

I would encourage you. Because for a Company that's under a consent order, your numbers are way too good. So congratulations again. Thanks.

Thanks, Joe.

Thank you, Joe.

There are no further questions at this time. I will turn it back over to Mr. Yu for any closing remarks.

Okay. Well, we are -- we feel very encouraged by these results, the second quarter. But we're more encouraged by the signs we're seeing at this point in time.

We are here, we are hoping that the economy would continue to hold at least. And we're looking forward to also reporting some positive results in the future quarters. Thank you very much.

Ladies and gentlemen, this does conclude the Preferred Bank second quarter 2011 conference call. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030. And enter an access code of 4458043. Thank you for your participation. You may now disconnect.