Preferred Bank (PFBC) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the 2012 Q4 and full-year earnings 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, January 23, 2013. At this time, I would like to turn the conference over to [Noelle Amos], Investor Relations for Preferred Bank. Please go ahead.

Thank you. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the fourth quarter and year ended December 31, 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 results, 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 SEC-required documents the bank 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 would like to turn the call over to Mr. Li Yu. Please go ahead.

Thank you. Good morning or good afternoon. I'm pleased to report that the bank earned $0.25 per share of net income for the fourth quarter of 2012.

During the quarter, we had very good loan growth and deposit growth. On the deposit side, it is also very rewarding that most of that growth coming from DDA growth and other transactional kind of growth.

We also have reasonable reduction in our nonperforming assets, and also during the quarter, we have improved our operations efficiency.

For the full year, our total loan growth is nearly 20% and our total deposit growth a little bit over 20%. Well, from my 21 years with the bank, we have had a couple of years of 20% growth, but it was never in this kind of economy. Certainly we have never did -- the 90% growth or near 90% growth for DDA and nearly 40% growth for other transactional accounts.

This performance is probably unprecedented and probably would not be -- not likely to be repeating. And I'm very proud of my colleagues.

I might also point out that these results achieved during a, well, relatively difficult situation. You see, in the first four and a half months of the year, the bank is operating under a cease and desist order. And in the remaining seven and a half months of the year, we are operating under an MOU, a memorandum of understanding.

Looking ahead, I'd like to think that credit costs in 2013 will be much reduced from 2012, and I have included my reasons and analysis in the press release. I see that our earning assets will also grow reasonably, if not good, because at this point in time we do see a very good loan pipeline, and also we have the support of a very good or, should I say, strengthening real estate market.

In 2013 we will continue to improve our operation efficiency. And lastly, we are hopeful that the memorandum of understanding that we enter into with our regulators will be lifted sometime during mid-year.

During the last regulatory review, we have only one item that is not in compliance with the provisions of the MOU, which is the classified assets or average the classified assets to be less than 50%.

Now, we have made internal calculation. As of December 31, 2012, this number now stands at 37% then. We are pleased with the result, and we are very hopeful for the new year. And I'd like to wish all of you a happy and healthy new year.

And I am ready for your answers.

Okay. Operator, I am ready to take questions.

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

First, Li, congratulations to you and your team on really a very strong quarter and a remarkable year, really. So congrats on that front.

And then my first question is with respect to the loan growth, which was terrific throughout the year and here again in the fourth quarter. Li, maybe this is a good question for you. Can you talk a little bit about how you are sourcing those loan originations and give a breakdown in terms of what percentage are being originated by in-house lenders versus those that are brokered or if there was any purchases or participations in the growth this quarter?

Wellington, do you want to answer that? I'd like to add to your answers a little bit later, okay?

A very small amount of purchase and participation, most I would say 90%, more than 90% of that is origination from our lender. As we mentioned before, we increased -- well, in a little bit more than 12 months, we added about six relationship managers in addition to what we have to increase our production.

Well, Aaron, I might add a couple of things on the situation. For the very little amount of participation we do, we treat it as out own credit. We've done our own credit review, and it's usually a club deal that the only two banks involved again. And then we went through our -- in case it was necessary, we went through our board also.

Another situation I'd like to explain to you is we do invest a whole lot of lopsided amount of our human resources in our upfront business aspect. We have -- other than the 10 branch managers, we have another 19 relationship managers in the bank. If you add Wellington and myself, we also are relationship oriented. We really have more than 20 relationship managers, plus the branch managers. And for our size of bank that is unheard of and, therefore, that we are producing a lot of deals for consideration. And we're able to be able to be selective because we like to maintain our net interest margin, and many of the deals that we are meeting heavy price competition, we just cannot take it.

That is very helpful. And of the six lenders you mentioned, Wellington, what was the timeframe over which they were added?

I think four of them were added last year.

Okay. And then with respect to capital, obviously the growth that you are putting on is terrific, but even so, it's the profitability that you have, the pace of absorbing your excess capital is probably going to take a while. Some I am just wondering what are your thoughts with managing that with respect to organic growth versus reinstating the dividends, possible acquisitions or even share repurchases? How do you think about those different options?

Okay, number one, one item is maintaining capital adequacies, and we have like a map out in the next two, three years period of time. And along with the growth that we will do in the range and was in the capital situation that currently we have and going forward we will be enhanced by the earnings as we see it, we will be very comfortable in that particular area. We're much in excess of the Basel III requirement, and even that will be -- to foresee in the next two, three years, we will be staying ahead, even at today's high, high MOU requirement.

Now on the -- once the MOU is lifted, certainly we will be reinstated dividends. At least that is the consensus opinion of the Board. Because we had been a dividend-paying bank for -- even though we are private. I think we have been dividend paying since 1998, all the way to 2007 when we have been dividend paying. So we certainly like to get back to the dividend paying.

And once the MOU lifted, with the excess capital that we have and certainly that was the availability of the new capital if we wanted -- I'd like to say that we have the resources that we will be able to do some optimistic -- opportunistic acquisition. And we also feel that there may be a number of smaller organizations may not be able operating efficiently under the current regulatory environment and the competitive environment. So we are hopeful of that, but we will be very careful in that respect.

Okay. That's great. I will step back.

Don Worthington, Raymond James.

In terms of the loan growth this quarter, what was the largest single loan that was made?

Louie, if you remember or Wellington, if you remember?

I think it was between $10 million and $12 million.

Okay. And then in terms of the noninterest bearing DDA growth, was that new relationships or existing customers? Just roughly the breakdown.

I would say about probably 75% were new relationship; 25% is existing customers.

Okay. And then when is the next exam scheduled, safety and soundness exam?

We were told -- in November, we were told it would be scheduled at March 15.

Okay. And then my last question, on the linked quarter increase in 30 to 89 day past dues, it looked like there was one residential loan of $5.4 million. Do you have any color on that?

Louie, would you want to answer that?

Yes, that is actually a loan that, a previously-underwritten loan construction project that needed to be complete. At this point, it is complete, and it is going to market based on very recent appraisal, we're at about 80% loan to value is our best estimate at this point, and we expect to -- obviously the borrower is looking to liquidate the collateral and repay us.

Okay. All right. Thank you.

Thank you.

(Operator Instructions). Gary Tenner, D.A. Davidson.

Just a question on total MPAs, it is down about $10.5 million sequentially. Last quarter you talked about having a big slug of OREO properties in escrow. Could you give us an update on what your thoughts are for the first quarter?

Well, it is probably one of the more difficult questions I can answer. Every time our hopes are so high -- for instance, in the last earnings phone call about 90 days ago, we had -- at that point of time, we told you we had about $20 million of OREO in escrow. And it turned out to be about only a portion ended up getting close. Some of the escrow gets extended. One or two of them gets pulled out. As of today, we have roughly [$15 million] in escrow. And we are as hopeful as ever that a portion of them will be close but in the next 90 days, but exactly how much, really it's very hard to predict.

Okay. And then on a sequential basis, your other construction category increased by about 50%. Given this is a relatively small dollar amount of your total portfolio, but could you talk about what that increase represented? Was that that sizable loan?

Let me just give you some breakdown. We are doing some construction loans right now, okay? The $18 million increase in the quarter, about $2 million to $3 million of it was related to funding up of the old construction loan that underwrited a long time ago that needs to be completed, included a question that Don Worthington was asking earlier. And with the remaining amount is three notable loans being the largest funding activity during the quarter.

Number one is a student housing facility right beside UCLA, about one block beside UCLA in Westwood, California. And we consider that loan is very, very, how should I say, sound loans that was underwritten about a little over a year ago.

The next one is a preleased warehouse facility to a successful pharmaceutical company by a long-time customer. And this pharmaceutical company is very profitable and has had annual sales roughly $800 million. So it is prelease activity. And it was a proper guarantee from our very well-capitalized customers.

And the third one is an apartment building that was built in a condo spec in a reasonably good location. And as apartments, it's value is in the $50 millions. As condo book value, it is in the low $50 millions. So we like that because we think at the current day's market, it gives two outs -- one is to take out financing if the customer chooses that; one is a sellout of the project if the market is kind. And it certainly looked like the market has much better now.

Okay. And then, if I could, one last question. In terms of reinstating the dividend, mentioned wanting to do that after the MOU lift. What type of payout ratio would you focus on in terms of the dividend?

We used to be, in the earlier days, prior to 2007, our dividend ratio was between 25% to 35% payout rates. And we have not -- the Board has not been deliberate on that particular payout ratio yet. But once we feel that the dividend is going to be reinstated, we certainly will come out with our guidelines for that.

All right. Thank you.

Aaron Deer, Sandler O'Neill.

Yes, just a quick follow-up with respect to the margin. If you've got an average balance sheet handy in the quarter, I'm just curious what the average rate was on your CD balances and then where new balances are coming on?

Aaron, this is Ed. Are you specifically referring to new CDs or our existing portfolio?

Yes, just comparing where new CDs are priced and what your market rate is on those relative to where the portfolio currently stands.

We are still putting them on at slightly below, but we are right now putting on some longer stuff as well from the CD side, Aaron, to lock in some longer-term funding. But still overall, when you look at the entire universe of new CDs and renewed CDs, they are still coming in at a lower overall cost than the existing portfolio.

All right. Thanks, Ed.

Sure.

Thank you and I'm showing no additional questions. Please continue.

Well, if there are no additional questions, we'd certainly like to thank you for your interest in the bank, and we hope that in the first quarter of 2013 we will be producing better results for the quarter.

Thank you very much.

Thank you. And ladies and gentlemen, that does conclude our conference for today. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325. That access code is 4590101 followed by the #.

Thank you for your participation. You may now disconnect.