Preferred Bank (PFBC) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Preferred Bank third-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 being recorded today, Thursday, October 18, 2012.

I would now like to turn the conference over to Ms. Kristen McNally, Senior Vice President Financial Profiles, Investor Relations for Preferred Bank. Go ahead, ma'am.

Thank you. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the third quarter ended September 30, 2012. With us today from management are Chairman and CEO, Li Yu; President and COO, Wellington Chen; Chief Financial Officer, Edward Czajka; and Chief Credit Officer, Louie Couto. Management will provide a brief summary of the quarter and then we will 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 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 would like to turn the call over to Mr. Li Yu. Please go ahead.

Thank you very much. Good morning. I'm pleased to report the third-quarter net income of $0.21 a share. In this quarter, we had a smaller than what we really want to have -- smaller than really want to have NPA reduction. The total NPA reduced by $7.5 million, which includes the $2.5 million that was paid -- I mean performing TDRs.

But the positive side is that we have a number of pieces of OREO now in escrow and we hope a good portion of them will be closing in the fourth quarter.

On the loan side, several loans now cleared the long and laborious process of foreclosure and bankruptcy proceedings are now closed to the position to be disposed of. So we are hoping that we should have more positive results in fourth quarter. Having said that, the NPAs in total has been reduced to the level of a much less of numbers compared to a year ago.

The fundamental of the bank remains very strong. In fact in the third quarter, we have probably historical production quarters in loans. In the quarter, loan increased roughly $66 million, which is about on the pace about a little bit over 25% on an annualized basis.

On the deposit side, we had an increase about 5.5%, which is annualized to be over 22% for the quarter. But deposit has been consistently growing to our pleasure, because we have been planning for this deposit growth since the early second quarter. As I stated in my press release, the TAG Program is about to expire without the Congress extension and looks like at this time everybody in Congress busy in the election, whether they actually get to that or not before the year end is kind of a questionable thing. If it doesn't, community banks will probably be facing some outflow pressure on the DDA accounts and we are certainly in a very enviable position.

Our long-time client continue to be healthy and we think first quarter we will continue to have long increases but it's pretty hard to predict how much the increase will be because the holiday season usually makes many things less predictable.

All in all, we are very pleased about the quarter and we are very positive about our NPA situation and very positive about our earnings outlook.

Joe, I am ready for questions.

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

Good morning, guys. Congratulations on really -- seen some terrific loan growth this quarter. I'm wondering if you can give us a sense of where the pipeline stands today relative to where it was a few months ago just to try to get a sense of what we might expect for continued growth going forward?

Well, pipeline today as compared to the pipeline three months ago remains approximately the same or a little bit probably just slightly below. Okay? But however, as I said, the unpredictable part is how many gets closed -- with the holidays in between. So we usually in our past experiences that we usually don't have any good reading on the actual execution of these loans because it is most times it is out of our hands. It is in the customer's hands, their vacation pay, [all lawyers] not working and all those situations usually delays the [posting] quite a bit.

Now Wellington, do you have anything to add?

No, not really. I think Mr. Yu pretty much sized up our pipeline current position and holiday season is always a big question mark, big if. But we assure that our production team continues to work very hard and diligently.

Along those lines, Wellington, you added to your production team over the past year, I'm wondering what might still be planned in terms of additional staffing that you might be bringing on board?

We generally have been -- one of the things -- and I just finished reviewing the whole staffing situation. Generally we are happy with our current production tape. We've probably reached a point of very comfortable level and if in the future we are going to add any one substantial and significant people, it will be more of a strategic type hiring now so that we know people that are good capability and good records that we will do it all in the area that we are comparatively slightly weak on. So to sum it up, we are probably very happy with the way we are right now.

Are there specific areas, lending niches where you're looking to fill out -- where you -- you suggested they might be a little light where you could see some strengthening to be done?

As you probably know, the hardest loan to get nowadays still remains to be the C&I loans and this is we -- requires a lot of work, a lot of expertise and in heavy, heavy competition and everybody has tried to diversify into the C&I loans and we are fortunate enough that we have a reasonable growth during the year. In fact, fairly good growth during the year. But this is one area we'll never, never be short of strategic people now.

Okay, thank you for taking my call or questions, rather.

Joe Gladue, B. Riley.

I wanted to I guess first touch base on the TAG Program and you mentioned it in your remarks. Do you know -- have you quantified how much of your deposit portfolio might be over the limits? I guess second part of the question is -- it sounds like you would like to keep the liquidity levels up at least until there is some resolution of the TAG situation. Is that fair to say that liquidity might stay elevated at least sometime in the first quarter?

I answer the general part of it and I will ask Ed to add more detail on that. The number one situation is that yes, we have run through every major account, EDA account in our box. It has been -- we have been doing that since early this quarter or as soon as the finish of second quarter and looking now possible -- how should I say -- that possible outflow, sources of outflow from. Many of these customers has been with us for a long, long time and they have keeping in excess of the guaranteed amount with us all these years.

So there are a lot of people that we don't think the (inaudible) will flow out, but in the meantime, we never know what actually what they would do. This is so unpredictable. That's why we keep such a big liquidity on hand.

But judging from the old days that even the pre-crash days, we still over having over $220 million $240 million of our DDAs and consider the new customers that we gain, we don't think that our liquidity will be greatly threatened because of that. That is in the first part.

In the second part of it is that in my history of banking, deposits always are one of the sources, one of the things very hard to get and it only becomes easy is this couple years. In the old days, you have to work very, very hard to get a deposit, so it has always been our practice to get deposits first and grow the loans afterwards.

So while we are finding out that now deposits are a bit easier to get, we never know when the situation will change so what we would do is we just go along and look as we go as far as the loan booking compared to the liquidity that we have. So it's an ongoing monitoring situation if we can keep less liquidity, excess liquidity obviously we wanted to, but if we do have a pipeline that we need to fill, having that liquidity is probably more desirable.

Now Ed, anything to add on that?

I guess the only thing I would add, Joe, is obviously you see the balance sheet $175 million in cash, $160 million in investment securities. In addition to all of that and really only about $30 million of those investment securities are collateralizing any deposits. Then in addition to that, we have about $100 million in available borrowing from our loan base at the Federal Home Loan Banks.

So all in all, I think we are very, very well prepared, probably overly prepared, which is fine in the event of a liquidity issue, so I think we are in great shape.

All right, let me sort of switch gears a little bit and just ask a little bit about a couple of the expense items. I guess in the press release it noted that compensation levels were up a little bit due to I guess some bonus, heightened bonus accruals and also I guess legal fees were up during the quarter. Wondering if we might expect both of those to come down a bit in the fourth quarter or if either one might stay at these levels?

On the salary expense level, Joe, or issue, we would expect the same run rate, very similar run rate that we had in Q3 going forward. You are right, there was a large reversal of bonus accruals in Q2 due to the year-to-date loss and then we picked up the accrual again in Q3 to the earnings.

From the other professional services, legal fee standpoint, we don't expect that level going forward. It will be obviously a little bit heightened but certainly not to level we saw in Q3.

All right, thank you. I will step back and let someone else ask.

Gary Tenner, D. A. Davidson.

(inaudible) in the fourth quarter. Any material gains, losses from those pricing? How were the disposal prices relative to where you've got the properties (multiple speakers)?

I would answer that in general again, ask Louie to answer that in more specifics. First of all, the general practices are for everything that was in escrow. If it is selling above our cost, we have used cost as a valuation. If it is below cost, we have already provided the write-downs in this particular quarter. So this is what we do and on the loan side, we believe we have fairly reserved other loan situation. Louie, anything to add?

Yes, just to reiterate, what Mr. Yu has said is that we don't wait until an escrow closes to reflect any potential deficiencies and expected sale prices, so included in the valuation allowances for ORE in the third quarter, would we estimate those and take the marks at that point? So the fourth quarter closing, successful closings of those escrows would not materially change from the carrying value as of September 30.

That makes sense. Thank you.

(Operator Instructions). John Deysher, Pinnacle.

Nice quarter. A couple of questions. When you talk about liquidating several OREO properties in the fourth quarter, what's the magnitude of that? I realize things could change and it could be pushed back to 2013, but as it stands now, what would the dollar value be of those properties you anticipate liquidating in the fourth quarter?

We have a good handling on that but I'm pondering whether we want to disclose this thing at this [forum] or not. But let me just say put it this way, we will be in the range of between -- what's in escrow right now is a range of between $10 million to $20 million.

Somewhere between $10 million and $20 million?

Yes.

Okay, fair enough. Then the other question concerns your memorandum of understanding with the regulators. You have had several quarters of positive results. I'm just wondering what the timeline might be for terminating that MOU and what's the benchmarks you have to hit to do that?

Facetiously that I hope you have influence on the regulators because we hope certainly that it can be terminated as soon as possible. But we believe we are in excess their requirement in all the areas except one area and we are fastly approaching to meet the requirement in that area. We are thoroughly confident without any events that we didn't perceive right now, we don't foresee right now, we are fairly confident that we are meeting that requirement too.

Now there is also a laborious process of when they are coming to do the examination and after the examination, usually there is an administrative process for them to go over and other review process and probably final review is to go to Washington and to have us released from that MOU. We certainly hope that it will happen soon.

Okay, the one final area would be your classified assets situation?

Yes.

What is the benchmark they're looking at? In general terms, what do they want to see?

Specifically we have disclosed the benchmark was 50% and then we are currently -- and that will be in our 10-Q report, okay? We are currently at the level 56%

Okay. What were you, say, last quarter?

Last quarter was 60-some%, 63% or something. I don't quite remember.

67%.

67%.

67% at the end of June, 56% now, and they're looking for 50% or so?

Yes.

Okay, so you are making good progress there. As you mentioned the exam, when is your next comprehensive exam? Is it --?

We have not received notice yet.

When would you guess it would be? You had one about a year ago. I think they left (multiple speakers)

If the logical -- logical guess is that they will show up in our place in late January, but again, we do not know. Okay?

Right, okay.

For the comprehensive examination.

I understand. Thank you, that's helpful.

A follow-up from Joe Gladue, B. Riley.

Just a quick one or two. What was the inflows to nonaccruals in the quarter? How did that compare to the prior quarter?

Actually it was about $600,000 and obviously in the June quarter, we had the events that we put out the press release on that were certainly extraordinary at that time, so it's very muted.

Okay, I just ask sort of a general question on the net interest margin and its direction (technical difficulty). Had some good loan growth in the quarter, just wondering if you can continue to grow loans at a good pace, that you can offset a lot of the margin pressure that exists in the current environment going forward and keep the margin compression small like it was this quarter, I guess two basis points in the quarter?

Actually, if you want my explanation, we didn't even really have a compression because the complicated accounting process of FASB 91 is required that you have a current deduction on the loan production you make and then you amortize the cost and that becomes the cost the loan which reduce the net interest margin. And I personally estimated that based on our third quarter thing, that could be as high as 5 basis points for annualized.

But having said that, we had really keep our net interest margin on the even basis even in light under this, I'm sure that I read everywhere there is margin compression everywhere in terms of the loan yields being depressed because everybody is fighting for loans.

So we think we can continue the fourth quarter with loan growth. We think we can continue to put loans on the book at reasonable range without negatively affecting our net interest margin. But to the extent how much improvement would there be, we really do not know at this point in time because the market is kind of very, very funny nowadays.

All right, thank you. That's it for me.

(Operator Instructions). It appears there are no questions, so I will turn it back to management. Go ahead, please.

Thank you very much. We at Preferred Bank are all very much encouraged by the fundamental improvement in our bank and going forward that we think we have the momentum and this is going through a rather, rather unfortunate quarter we see even in our opinion a good payment loan of huge amount being written down about $6.6 million. So in a way maybe that's a silver lining for the future that we have some hidden assets going into the future.

But regardless of that, it's already past. What we have -- what we are facing is a continued effort in further improving our bank and we think we are on the right track.

With that, I would like to thank your attendance.

Ladies and gentlemen, that doe conclude the Preferred Bank third-quarter 2012 conference call. If you would like to listen to a replay of today's call, you may dial 303-590-3030 or 1-800-406-7325 with the access code 4569671. Again, thank you for your participation and you may now disconnect.