Preferred Bank (PFBC) 2012 Q2 法說會逐字稿

Welcome to the Preferred Bank second-quarter 2012 conference call. During today's presentation, all parties are in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, July 26, 2012.

I'd like to turn the conference over to Mr. Tony Rossi. Please go ahead.

Thank you, Operator. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the second quarter ended June 30, 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 statements. Preferred Bank assumes no obligation to update such forward-looking statements.

At this time, I'd like to turn the call over to Li. Please go ahead.

Good morning, ladies and gentlemen. On July 5, we had released a report to you informing you of the two unfortunate events resulting in large credit charges which will cause the Bank reporting a loss in the second quarter.

At the time we have stated that we believe these two charges are of isolated nature that will not affect our future operations or profitability. I'd like to again confirm our belief today.

Of all the other aspects of our business, our loan growth in the second quarter continued to be strong. If it wasn't for the $16 million charge-off we had to take on these two loans, and the $31 million payoff we had occurred on April 2 -- which we had discussed on the last conference phone call -- our total loan growth would have been $60 million per quarter. But the final results still shows a $15 million increase from the last quarter.

Our pipeline continues to be strong. And we believe the pipeline, as of the end of the second quarter is at par or better than the pipeline at the end of the first quarter; and certainly is notably better than the pipeline as of December 31. During the quarter, we had originated $129 million in new loans.

Next are deposits. Our deposits continue to be the bright light. We have increased $60 million in total deposits for the quarter. All of them are in non-interest-bearing or money market accounts. Because of the increase, and because of a continued shift to lower-cost deposits, our cost of funds has improved. Today we have $190 million-plus of cash on hand, plus a $140 million total security investment. These [balances] will assure our future loan growth can be funded.

Our net interest margin for the quarter is 3.99%, but if we purified that by taking out the mostly nonrecurring interest recovery on previously charge-off loans, our net interest margin would be 3.93%. This is compared to the 3.87% on the same basis last quarter, which showed a 6 basis points improvement.

And going forward, as we continue to fund our loans with the excess cash we have had, we like to think that our net interest margin could be on the upward trend.

In all, we are very, very disappointed about the credit losses incurred in this quarter. But because they are of an isolated nature, we are not discouraged by it. And as of today, as I look forward, we see continued possibility for the Bank; and, hopefully, continued improvement of profitability of the Bank.

Thank you. Now, we're ready for your questions.

(Operator Instructions). Aaron Deer, Sandler O'Neill Partners.

Good morning, guys. I suspect the call might be a little light. There is a different number that SNL had for your --

Yes, we kind of got wind of that right at the last minute, and have tried to let people know as quickly as we could there was a prefix problem.

Sure. Just a question on the large SNiC loan that was put in and held for sale. Just curious, it seems like with the cross-collateralization that you've got on that with the cash flow and property there, that the actual loss is probably going to be fairly modest. I'm just curious, in that it is sitting in held for sale, what is your thought there on dealing with that, going forward?

Well, I personally am optimistic about that. I'd like to think the cash flow stream is pretty stable. And I'd like to think the underlying collateral value will be continuously improving, based on both most real estate trends in the area. We are carrying a bucket to $0.55 to $1.00. And I calculated it -- if we will be selling it at $0.55 for $1.00, that the IRR will be over 20%, with upside on the interest rate changes and upside on the potential treatment of a capital gain on the large differences -- 45% of the note to take.

So with that, we like to sell it at a much better than the carrying value that we have, what we are carrying on the book. So, this thing will be continuously under review and against different type of offers that was brought to us.

Okay, that's helpful. And then, just curious on your thoughts, given the size of these credits -- and I know there is some other larger-sized credits in the portfolio -- how were you thinking, going forward, in terms of risk management, in terms of -- where do you see as being the ideal sized credits that you are booking? And how manage those larger credits going forward?

I'm going to let other people augment the answer, but generally we are on the road of gradually -- I mean, granularize our credit. But being that we are a business bank in the major city, we don't have -- we are not in the home loan businesses. Our business is doing loans, and doing the business type of loans and real estate type of loans.

And here in the major city of Los Angeles in the West Coast, it's hard to do a real estate loan -- let's say, $2 million, $3 million -- and you don't get the type of quality or even get the availability of that. And so in many cases, the so-called word granularity has been in our minds for the 20 years period of time. But we are actually, our total average size for loans is reducing.

Okay, thanks, Li. And then, Ed, my question for you, given the profitability outlook for the remainder of the year and the results for the first half, what are you thinking in terms of an effective tax rate for these last two quarters?

Well, given the loss in the second quarter, Aaron, the effective tax rate was reduced a little bit, because we essentially used an estimate for the entire year. So, obviously, that's been reduced. Inasmuch as that gets reduced, the effective tax rate comes down correspondingly. So we would look for an effective tax rate similar to what we saw in the second quarter, and that would be in the high 20s, low 30s.

Okay. Great. Thanks for taking my question.

Joe Gladue, B. Riley.

Yes, hi. I just wanted to touch on the total balance sheet growth. You've had some pretty good sequential quarter growth the last several quarters, about 4%. And while you are growing loans pretty good, there is still good liquidity there. Just wondering if you might consider slowing down the growth in deposits, or is that growth in the balance sheet is going to continue?

Well, obviously, if the numbers say for net interest margin-wise speaking, and for capital ratio-wise speaking, slow the growth of deposit is a great situation. But as we are [viewing] our franchise going forward, it will be the nicest thing to have continued increases in low-cost deposits in our balance sheet, even though it means a short-term little disadvantage; but over the long-term, will prove to be most valuable to our institution.

As long as we can get it, we'll continue to get it. But you know deposits are sometimes are very unpredictable. There's no such thing as a pipeline for deposits. It's just continuous working, continuous that we're lucky to be in this situation so far, but we work hard. If it increases the same rate, we'll be very happy.

All right. You mentioned growing the franchise. Just wondering what the thoughts are on any additional branches or other growth in the network.

We have one thing that we are currently contemplating -- a new branch we're contemplating. And as far as other growth situations that we have not come to the horizon yet; perhaps in the later half of this year that we will have additional growth ideas.

All right. That was it for me, thank you.

(Operator Instructions). Michael Howard, AllianceBernstein.

Hi, guys, how are you? Two questions. The first is on credit metrics and the progress there. And then the second is on capital management. On the credit front, just a factual question -- the two problem exposures that led to the pre-announcement this time around. Where they both already previously classified?

Yes, both were already substandard.

Okay, so there wasn't any negative migration there. And did classified asset dollars go down during the quarter?

In fact, they did. Last quarter, classified loans were $114 million. They are now at about $90 million.

Yes, so good progress there. And the classified asset ratio also declined?

As a percentage wise, it was [100.03%] for the last year and 69% for this quarter. And, so it's quite good progress. That's one area we're happy with.

It's a lot of progress. And, obviously, the stock has moved since the pre-announcement in the other direction. Good progress there, which brings up the second question, which is on capital management. It's a little bit of a hypothetical, but to the extent you're comfortable commenting on it, as we get to the back half of the year, assuming that classified ratio continues to go down, now that you are out of the more formal agreement and down to an MOU and still have a 12 handle on the leverage ratio, what would be your approach to capital management if the stock is still trading where it is today? How would you think about buyback?

Well, at this point we have previously discussed the matter. We have, in the last quarter, I have outlined our preferences about employment of the capital. The first is that for the growth, we certainly anticipate that the institution is going to continue to grow. And that would be the most efficient for all of our shareholders, in our opinion. The second thing is, obviously, we're talking about dividends. And the third thing is we are not ruling out the buyback.

However, the buyback does have to have regulatory approvals in our case. And even so if we have a formal agreement, we still -- we become a no-agreement type of bank -- we need still need the regulatory approval because we are not a holding company; we are a bank. So we are still subject to regulator approval.

Aside from that, with the new capital rule, with all the uncertainty in the new capital rule, whereas all the reduction increase in required amount; all the reduction from the capital and adjustment risk-based assets; and we are sort of like making this -- so buyback or immediately reduce a large amount of capital, make it certainly something that we have to really, really study very carefully.

So at this point in time, though I can say to you that we are still continuously under evaluation.

Okay, thanks.

We have no further questions. I'd like to turn it back to management for any closing remarks.

Okay. Well, thank you very much for your attendance to the conference phone call. I must say that it is rather unfortunate and disappointing to have to, in our continuous road of recovery we have done pretty well. But now we're hitting the stumbling block. But that we think that good things always come after much of the torture during the process. But we here at Preferred Bank -- with a lot of people sitting in this boardroom listening to this phone call, come to this phone call -- we here at Preferred Bank all believe that our profitability will continue, and to continually improve. And we have some very exciting opportunities ahead of us. Thank you very much.

Ladies and gentlemen, that does conclude the Preferred Bank second-quarter 2012 conference call. If you would like to listen to today's replay, the phone number is 1-800-406-7325; access ID 455-2222. Thank you for your participation. You may now disconnect.