Preferred Bank (PFBC) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the Preferred Bank first-quarter 2012 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 also being recorded today, Thursday, April 26, 2012. I would now like to turn the conference over to our host for today, Ms. Kristen McNally, Investor Relations for Preferred Bank. Please go ahead.

Thank you. Hello, everyone, and thank you for joining us to discuss Preferred Bank's preliminary results for the first quarter ended March 31, 2012. With us today from management are Chairman and CEO, Li Yu; Chief Financial Officer, Edward Czajka; Chief Credit Officer, Louie Couto; and Chief Operating Officer, Wellington Chen. Management will provide a brief summary of the quarter and then we'll open up 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 materialize, or any of these assumptions prove incorrect, Preferred Bank's results could differ materially from its expectations as set forth in these documents. 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. Please go ahead, sir.

Good morning, or good afternoon. Welcome to our conference. I'm very pleased to report to you that our first-quarter earnings is $22.3 million, largely because we decided to record the recovery of our previously written-off deferred tax assets or DTA. We've been contemplating of this matter for a while, and finally timing seems to be right in the first quarter. Consequently, capital, our capital ratio, and our book value all improved notably.

During the first quarter, we have reduced our nonperforming assets by the total amount of $16.4 million, or 20% of the total. While we think this quarter is relatively positive in this aspect, we will pledge to continue our effort in resolving these nonperforming assets in the remainder of the year.

Total loans for the quarter increased nearly $40 million, or approximately 4% of the total loan total. If you take into consideration the $15 million of nonperforming loans note that we have sold, we actually increased our earning loans by the amount of $54 million plus. Now, this amount is bigger than we had previously expected.

As you may recall, in the last quarter's earnings call, I had told you that we are expecting a large loan relationship to be paid off in the first quarter. It did not happen. But it happened on April 2. Therefore, before the conference call, we have took a closer look at our pipeline, and we believe our second-quarter loans will continue to increase. Although it may be slightly slower than the first-quarter number.

I am most pleased with the deposit production for this quarter. With a huge increase of DDA, and consequently, we also let a little bit of our PCDs run off as they represent higher cost deposits. We now have a deposit portfolio which is much more balanced, much more improved, and presents a lower cost going forward. On the side note, for the first time, we have EDA, our transaction deposits exceeding our TCDs in total, and this never happened before to us, and certainly make us a very nontypical Chinese/American bank.

Net interest margin also improved. Net interest margin for the quarter is 4.06%. Well, this 4.06% included a one-time recovery of previously charged off interest in the amount of approximately $600,000. Without that, the net interest margin will be 3.87%, as compared to the 3.69% of the fourth quarter of 2011. Still represents an 18-basis-points increase. And we're pleased with that.

In the previous earnings call, I have expressed my belief to you about the positive outlook of Preferred Bank. And today, I like to reconfirm my belief. Our decision to record the deferred tax assets is the best reflection of our conviction. Thank you very much. And we are ready for your questions.

Thank you. Ladies and gentlemen, we will now begin the Question-and-Answer session. (Operator Instructions.). Aaron Deer; Sandler O'Neill Asset Management.

Hello. First, Li, congratulations on another terrific quarter. I know how hard you've been working the past few years.

Thank you.

And it is great to see some of the things go right this quarter.

Thank you.

The first question, I think the classified assets ratio, somewhere around 57%, with the boost now that you've with the DTA recovery, and impressive improvement in nonperformers, can you give us an update on where the classified asset ratio stands or stood at March 31?

General answer is, it is really down in the first quarter quite a bit and then will continue to go down because we will have additional steps in resolving the remaining classified assets. But I will let Louie give you more detailed on that.

Aaron, I think the ratio you're actually quoting is the ratio tied to our consent order, which specifically deals with our classification as of the 2009 reported examination. And as of year end, it was at 57%, compared to the consent order requirement of 50%. During the quarter, we have reduced that and now we are within the 50%. Overall, on a more macro picture, as we put out as of year-end, we had $140 million in classified loans. And we are now down to about $115 million as of March 31.

Okay. That's helpful. I appreciate that. And then add maybe some color on the margin, I know the core margin was down, or I'm sorry, up, rather, by 18 basis points. I know there's a lot going on, and what is going on with the quarter perspective, deposit mix and the loan growth perspective. Maybe you can help give us some thoughts on what your expectations would be for that number going forward?

Well, I think a lot of it, Aaron, first depends on loan growth. So we will say that. We will start with the funding side, though. On CDs, as Mr. Yu said, we're letting a lot of those run off, which is fine. We're doing a little bit of a change of the mix in the funding component of the bank, which is great. We do have a lot of CDs continuing to mature. And obviously, the preponderance of those are continuing to renew and roll over. We have about $150 million maturing just in the next three months alone. So we are seeing CD yields continue to come down.

As I said last quarter, I don't think there is a lot of room for them to continue to come down as they renew. So the biggest component, the biggest change of the funding cost has been the mix in the funding, Aaron. On the asset side, the margin will really be driven by loan growth. As we continue to put some of that low yielding cash to work. So in terms of margin expansion, I wouldn't look for expansion such as we had in the first quarter. But I would certainly look for maybe single-digit basis points expansion over the next three quarters.

Aaron, this is Li Yu. Obviously, you're more braver than I am to get into the detail of these things. But in generality, a couple of things I would like to add. Number one is on the cost side. We still benefit partially by the payoff of the senior debt, which will result -- first quarter, reflected only half of the savings, which is about $75,000. The following quarter, we have the full quarter effect coming along. So there will be some improvement. And because the first-quarter repositioning of our deposit mix also will be little improvement.

And on the production side, one of the things I have been looking at A, is that we're putting some of the idle cash to work. The second situation, we are very careful and try to review to the loans, maintaining, at least maintaining our current net interest margin. And hopefully if we can, we will try to improve that. Because as you can see in the marketplace right now, probably hear from everybody, rates just sucks, okay? And a whole lot of competitions in this aspect. I let Wellington give you a little bit more insight about that, okay?

Well, the market, as Mr. Yu mentioned, is very competitive. Our pipeline is healthy. So because of that, we started actually last year to really looking into the market, in terms of how to build up our pipeline. And a couple ways of doing so is that as the bank continue to improve, we have the previous customer coming back.

And those customer, they know Preferred Bank, so those are the business that we can try to recapture. On the end, after existing customer here, the business continue to improve or expand, and sales going up, and we will continue to provide more service to them.

And of course, on the new business side, alongside with the new people that joined Preferred Bank, as well as the existing production team that we have instilled a very focused market business development. The BD team understand that. The market is very competitive. How do we manage to bring in new business, as well as managing our risks? So those are very important to us. And we will continue to execute.

Great color. Thank you for taking my questions.

Okay.

Joe Gladue; B. Riley and Company.

Hi. Congratulations as well.

Hi, Joe.

I guess I'd like to dig in a little bit more on some of the issues you just covered. First off, let me just start off with the noninterest bearing deposits. You did have a pretty big jump in those in the quarter, and just wondering if you could give us a little more color on what was driving that?

Okay. We've been a long time giving credit aid to certain accounts, especially the legal professional accounts, where they hold a lot of the trust relationship on the DBA balances. And we happen to have good success in that area in the months, in the first quarter. Aside from the fact, because of prior increases in C&I loans. Some of the loans gradually bringing their deposits in, in the first quarter. And also, especially when Preferred Bank's business start to gradually improve, some of our old customer is bringing their deposit balances up. It is a multiple thing. But largely aided by the gaining of several attorney trust accounts is a notable thing.

Okay. So those gaining of accounts is going to be fairly lumpy. That's not something we should expect every quarter, going forward.

No. If I expect them to do the same thing this quarter, you would probably shoot me, you know. And my staff, you know.

And just on the asset yield side, if you take out the one-time items, you still had the 18-basis-points improvement in the core net interest margin. And I think a good bit of that was driven by asset yields. Was there anything else going on there besides the increase in the loan portfolio?

On the cost side, there is also reduced costs, okay? We will get into that now.

The funding costs is coming down due to CDs and as Mr. Yu pointed out correctly, the $26 million senior debt payoff which happened mid-February. So we've really only gotten one-half of a quarter's impact on that, Joe, on the margin. That's why I felt a little comfortable going out a few quarters in terms of forecasting.

In terms of overall asset yields, I don't think we're seeing anything different than a lot of other banks in our market are seeing. We didn't do anything on the bond portfolio during the quarter. Although that could change in future quarters if we continue to hold high levels of cash, and the bank's financial condition continues to improve. I don't see a problem in putting some of that money to work. Obviously still even a large liquidity cushion. So hopefully that answered your question, Joe.

Yes. Maybe looking ahead a little bit, but you guys are building up pretty hefty capital levels, and just get your thoughts on what you can do with that down the road?

First of all, we would like to use the capital lever to get our regulators to the site. Let's assume that's done, okay? And which we certainly hope that it will be done very soon. And there are multiple choices that we have. Our Board has not really committed to any one direction here. It does give it a possibility in the future, obviously. As you probably know that we have been, for about 14 years, we will be paying dividends. And the buyback possibility.

And there's obviously, our business is growing, which requires capital, and which probably take preferences to any other employment of capital. And then lastly but least, there is always some other opportunities such as corporate development opportunities that may happen. But we don't count that in, but we know the possibility exists.

Okay. All right. That was all I had. Thank you.

Don Worthington; Raymond James.

In terms of the noninterest expense line, anything in there that would be nonrecurring? I know there is probably bonus accrual, that sort of thing, in the first quarter. Just trying to get a feel for how much of the expenses may not be repeated next quarter.

I will let Ed answer in more details.

Okay.

Hi, Don.

Hi, Ed.

Part of your question regarding nonrecurring costs, unfortunately, right now, we still have to look at OREO expenses of recurring costs simply because we're holding the level that we're holding. As far as valuation allowance on ORE charges, we had, I think $1.1 million this quarter. That is going to be lumpy in future quarters. So it is hard to say. We don't expect it to be at that level in future quarters, Don. But obviously, we can't say. We can't make that prediction.

A few other areas, legal costs are still at elevated levels, simply because of the level of nonperforming assets. FDIC premiums are still at somewhat elevated levels. We'd expect those to go down, probably by 10% to 20% over the next 3 or 4 assessment periods. Let's see. That's probably it in terms of nonrecurring.

The bonus accrual is going to be a now recurring charge, based on our bonus plan that has been approved by shareholders. And so to the extent that we're making money, we will continue to accrue bonus based on that plan, albeit at a much lower level. We have amended that plan. So that's probably it in terms of what is nonrecurring.

Okay.

So hard to say going forward. Because some of those areas are going to be lumpy. But we are going to see some consistent declines in some of those areas such as legal costs, FDIC premiums and loan collection expense.

Okay, great. Thank you. And in terms of the loan growth this quarter, anything in particular that was maybe a large loan in that amount?

No. It's a whole number of loans. We, right now, we have a whole lot of loans, and then probably represent a fairly good diversification of these loans in term of the category, the yield.

Okay. And those are all in the local market?

Yes.

Okay. All right. Thank you.

Gary Tenner; D.A. Davidson and Company.

Just a couple of questions following up, I think on Don's. In terms of the personal expense increase, fourth quarter to first quarter, how much of that would you say was driven by FICA coming back in versus the bonus accrual?

Not too much of it was FICA coming back in, Gary. Probably in the neighborhood of only $60,000 of that. As we've indicated in the text of the press release, we are continuing to add to staff. The bonus accrual is something that was not in the first quarter of 2011 for comparative purposes. We did have a lower level of bonus accrual in the fourth quarter of 2011 for comparative purposes. And I think that is about it.

Okay. And on what you guys detailed in the press release as the nonrecurring OREO charge, can you give any additional color on that?

I will be happy to. This is Louie Couto. What actually happened there was a participation purchase that had gone into ORE. The ORE had been sold, and there were some litigation at the time. In the past, the agent bank had given us some conclusions based on their legal advice that we had a very good chance of winning the case. Unfortunately, in the first quarter, there have been some negative events associated with that. And as a result, we decided to recognize that probability of a loss on that ORE.

Okay. And then just one last, if you could just remind us what the size of that relationship that exited the bank was in April?

It was multiple of loans. Total amounts close to $30 million.

Okay. That's what I thought. All right guys. Thank you.

(Operator Instructions) John Deysher; Pinnacle Value Fund.

Regarding the consent order, my understanding is the regulators were scheduled to do a full-scope review sometime during Q1. Has that exam occurred? Are they still on site? Have they finished up? What is the exact status of that exam?

Regulators have conducted a full-scale examination as of December 31, by sending over 37 examiners coming in. They finished their field work in early February. And then they have performed exit conference with our Board of Directors mid-February. So this, to answer your question.

Okay. So have you received a final report from them?

Not yet.

When do you expect that?

I hope soon. But we have not received that yet. We are not in a position to guess when, you know.

Okay. I am just wondering how soon you're going to be out from under that consent order. Because although the profits have been coming in nicely, the other part of the equation is the nonperformers. And I'm just wondering, assuming profitability stays the same, where do you see nonperforming assets being at year-end?

This is one of the hardest questions to answer, John. If we had any idea at all, we will let you know about it. Because the liquidation of the resolution of troubled assets always has many bumpy roads. First of all, to take a typical loan is concerned, first of all, you pass a long period of collection process. Then you have to go through a foreclosure process, which may be a bankruptcy proceeding and a litigation process.

Then take an OR yield. And then you have to hold it for sale. All of this long process of time. All along an ORU on a different stage of this kind of things. We are probably more anxious than anybody else to get rid of these things within the utmost of capability.

Okay. Without reducing them at fire sale prices.

I think that we have been known to our shareholders for many years that we have the capital, we could be very selfish and reduce them in the fire sale prices so that management will be operating at ease and comfortable level. But we have decided that it is our duty to our shareholders to recover as much value as possible. Which makes the process a little bit longer. A little painful. A little unclear to even our regulators. But we think it is worth it.

Okay. We would agree. The other question, you mentioned in terms of capital allocation dividends. And has this bank paid dividends in the past? I don't recall it doing so.

As of 2007, between the year 1996 and 2007 we have been paying dividends continuously. And we have a dividend increase every year. The last dividend that we paid, we believe it is equal to $0.80 a share.

Okay. All right. So that is something you could conceivably return to if tax rates and other factors fall into the right area.

On this one, I can speak only for myself. Again, you know it is a Board decision. I'm a shareholder. I would love to have dividends.

So would we. Thank you.

(Operator Instructions). There are no further questions in the queue at this time. Please continue.

Well, I think that we have a good quarter. And here in Preferred Bank, we always remember a whole lot of things we can do ahead of us. And we will try our best. Thank you very much for your attention. And thank you very much for your interest. We will close our conference phone call now.

Thank you. Ladies and gentlemen, this concludes the Preferred Bank first-quarter 2012 conference call. If you would like to listen to a replay of today's call, please dial 303-590-3030, or the toll-free number of 1-800-406-7325 and enter the access code of 453-1616. Thank you for your participation.