Preferred Bank (PFBC) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to Preferred Bank's second-quarter 2013 earnings conference call. (Operator Instructions). I would now like to turn the conference over to 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 financial results for the second quarter ended June 30, 2013.

With me today from management are Chairman and CEO Li Yu, President and COO Wellington Chen, Chief Financial Officer Ed 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'd like to turn the call over to Mr. Li Yu. Please go ahead.

Thank you. Good morning or good afternoon. Thank you for attending our earnings conference.

I'm very pleased to report to you our best quarter in the last five years. For the quarter, with a earned net income of $4.3 million, or $0.32 per share. This is after taking into consideration or accounting for the interest adjustment that was discussed in our earnings release.

Linked-quarter loans increased 5%; likewise, linked-quarter deposits increased 2%. Today, our total assets reached $1.65 billion. Our loan pipeline as of June 30 continued to look quite favorable. Although in the third quarter we are anticipating more than $60 million large payoffs, but with the production record we've had in the last nine months, we believe that at the quarter-end, loans is going to continue to increase.

It was mostly because of our balance-sheet management we're able to hold our net interest margin or improve a little bit to 4.04%, which includes the --- which adjusted by the interest that reversal we talked about in our press release.

Looking forward, with the steepening of yield curve, we believe that our long-term NIM outlook is very positive. However, compression pressure remains for the rest next half of the year, although it seems like moderating.

Today, 80% of our loans is on a floating rate, 14% of loans is on a fixed rate. Out of the fixed-rate loans, more than half of it is covered by deposits with equal or similar maturities. So our balance sheet is very asset sensitive and we are poised to take advantage of the interest rate increases when it happens.

For the quarter, we have continued our effort in reducing our nonperforming assets. NPA reduced for the quarter by $6.6 million, or 18%. More importantly, the net resolution cost for the quarter is nearly negligible.

Again, looking ahead, with the reducing level of our NPA and the with improving real estate values and with our conservative valuation of our nonperforming assets, we are very hopeful that the future net resolution costs, if any, will be less than material at the worst, and our total net performing assets will reduce for the remainder of the year.

We are also quite pleased with our improvement of the efficiency ratio. For the first time in many, many quarters, it came down to less than 50%. Actually, it's 47.7%, then. This is largely because this quarter we have big reduction in OIU expense, which accounting includes in the noninterest expense section. And because of that, we feel that in the future there's room for moderate improvement.

Compared to our peer group of California banks of similar size, our shares is currently selling at a discount to our peer group. I still remember about 8.5 years ago when we first went public, our underwriters were marketing Preferred Bank stock as a value stock with growth potential. And I personally believe that's a pretty good description of the situation now.

So now, I'm ready for your questions. Thank you.

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

I have a couple of questions. First, I was curious, your reserves. You brought that down quite a bit, and I'm just curious what your thinking is on that particular. Just given notwithstanding what sounds like it might be a little slower third quarter, your growth outlook remains pretty good. So I was just thinking you might be looking to grow into that reserve, rather than bringing it down?

At this point in time, Aaron, I mean, it's very positive --- it's very possible that we will have additional provision in the third quarter in line with our loan growth, okay?

Our reserve was brought down in several reasons. Number one is that that's why our historical reserve is greatly reduced because our methodology look-back period has already passed, that the heaviest loss we have suffered is 2009. So FAS-5 is going down.

Number two is that we have been aggressively charging off the specific reserve place on each classified asset. So to this day, probably the total FAS-114 reserve relating total picture is really over 10% of the total amount. So all of them is carrying at almost the net cost. So that's the reason it's coming down.

Okay. And then, the tax rate in the quarter seemed to bump up much higher than I would've anticipated. Is there some sort of noise in there that caused that?

Yes. Hi, Aaron, it's Ed. We had a couple of things that affected the effective tax rate for the quarter. The first was the true-up of the 2012 tax return versus the provision taken back in 2012. As they complete the tax returns, there's obviously a little bit of an adjustment, so we took that during the quarter.

The other thing is we had some discrete items related to 123R expense, benefits which were not fully utilized. We do anticipate in future quarters that the effective tax rate will come back down, Aaron, to levels more closely resembling the first quarter.

Okay. And then, Li, I was wondering if you could give us your thoughts on how you think about the growth outlook and preserving capital for that purpose, versus when we might --- when you might be looking to bring back a dividend of some nature.

Well, as I said, we have not received examination reports yet, okay, so this part of it, I will not be able to tell you whether we are in the position to immediately declare the dividend or not.

In my mind, as a large shareholder myself, I look at the banks. We earned $4.3 million. Historically, we should be, I mean, declare about $0.10 dividend for that particular quarter, okay? And I certainly will hope that they will come soon.

Okay, so notwithstanding regulatory approval, is $0.10 per quarter kind of your idea of what would be a good payout level?

We usually pay off in the past, it was 20% to 35% of our earnings, okay? So that's a historical number.

And since a majority of our Board composes -- I mean, both people is about the same. And I like to think that -- put it this way, I don't detect any change of philosophy at this moment in time.

Okay, very good. Thanks for taking my questions.

Gary Tenner, D.A. Davidson & Co.

A question, I suppose you're limited in terms of what you can say on this, similar to the dividend discussion. But given the changes to the loans that the regulators have suggested get added to nonaccrual, what is your sense of what that could mean for having your regulatory order lifted and enable you to pay a dividend at all?

Number one answer is partially given earlier, that at this point in time that we didn't have the report. It was current law and regulation forbids me to indicate in any of the other specifics that was told to us on a verbal basis. And frankly, it's also subject to supervisory review, the report, so I don't know if the end result is coming up.

But I have to be mentally prepared, okay, and that -- we are not necessarily immediately able to declare a dividend.

Okay, thank you for that. And then, in terms of your kind of balance-sheet management, obviously you've done a great job growing the loan portfolio and deposits continue to grow a little bit, but you're getting up towards about 90% or closer to 90% of loan deposit ratio. Can you kind of talk about what your comfort level is, how high you would allow that to go as you manage the balance sheet?

We --- our internal situation has always been not having our loan goes to, like several other competitors, it goes to 100% or more, okay?

So that has been our internal policy before and I think our policy is still something less than 100% that it's the maximum we do. And Preferred Bank has always in the last 22 years, my involvement with the Bank, always try to grow deposits first and loan growth second. But deposits and loans, it does not come sometimes at the same speed, so certain quarters are high deposit production, certain quarters were lower.

We certainly recognize in the last two quarters deposits increases has been slower than the loan increases, but fortunately, we have a lot of excess cash that was sitting in the excess cash, excess liquidity. So, so far we're still very comfortable, but to make a long story short, we have been working quite diligently on the deposit side, okay?

So Wellington, anything to add on that?

I think as Mr. Yu mentioned, Gary, that our priority is always to grow deposit first, so we have five account officers. They only focus on deposit generation, and we also are looking at certain particular special industry as well.

So that's always been our priority, and we will focus on that and we believe that we will be able to continue to grow our deposits to keep up with our loan pace.

Thank you.

Hello?

(Operator Instructions). John Deysher, Pinnacle Value Fund.

A couple of quick questions. One, on the examination report, when do you anticipate receiving that and would there be the expectation that that report will address the MOU situation? Or is that a separate discussion after you get the examination report?

That answer to you is I don't know. It will be determined by our regulators.

But when do you anticipate getting the report? They have been there already, I guess.

I wouldn't know. I certainly hope is it's going to be sooner than later, okay?

Okay, and there may or may not be a discussion of the MOU in that?

I don't even know what the procedure related to that. It could be a separate thing, it could be the same thing. We do not know.

Okay, understood. In your prior comments, you referred to the steepening yield curve and I think you said that you are well positioned for a rise in interest rates. 80% of the loans are floating. I think you said 14% were fixed rate. What's the other 6%? I know it's only 6%, but what would fall into the 6% bucket?

I think 86% is floating, 14% is fixed rate, okay? That adds to be 100%. All this 14% fixed rate, we have covered more than 7% of it with similar deposits -- similarly, I mean, maturity deposits.

Okay, so 86% is floating, 14% is fixed.

Yes.

Okay, understood. And then, on the NPA migration chart that you show, there was some discussion of troubled debt restructurings, TDRs. What was the level of TDRs at the end of Q2?

I would like to let Louie answer that particular question. He's quickly opening up his big file, okay? Louie?

It was --- hi, John. It was not materially different. The TDRs were about $700,000 higher in Q2 than as of Q3.

Right, but what was the absolute number? Do you have that?

I don't have it in front of me, but I know the reduction was about $700,000.

$700,000 from Q1?

From Q1, yes (multiple speakers)

I'm sorry, I didn't hear you. $700,000 reduction from Q1 or (multiple speakers)

From Q1 to Q2, yes.

And then, finally, there was a line on the balance sheet which wasn't there at year-end, something about investment in affordable housing, $5 million. It's a small amount, but I'm just curious what that is.

Hi, John, this is Ed. That is an investment in a low-income housing tax credit, which we started in the second quarter this year. We're going to continue to make an investment in that.

The amount will get up to $10 million over the next few years, will be our total investment. Very good return in this fund, and about 63% of that asset, that investment, will also count toward CRA for the Bank, Community Reinvestment Act credit. So that's the new line item.

What is the risk there, Ed?

Well, the risk is that the fund itself or the developers that are going in and rehabbing the properties don't perform.

Obviously, as you can imagine, before we make an investment such as this, we treat it very much like a loan. We go through and do all the due diligence we would otherwise do in any kind of a lending situation. The fund that we're involved with has -- I believe they have done 159 funds so far. They have had zero clawbacks in terms of tax credits, so we feel very comfortable. Obviously, a lot of other parameters were looked at, but those are kind of the highlights.

Have you invested with them before?

No, we have not. But a number of the banks in southern California have and I've spoken with their CFOs regarding their investment in this.

All right, good. I hope it works out for you. Thank you.

(Operator Instructions). I'm showing no further questions in the queue at this time.

Okay. As usual, we appreciate your interest in the Bank, to support the Bank, and as you can see, every quarter that we have been including our operating income, every quarter in the last few -- I mean, last number of quarters that we have been reducing our credit costs and efficiency has been improving. And as I put in the press release that I had reported to you before in January and April that I'm very personally very optimistic about the Bank and I'd like to reconfirm that feeling today. Thank you very much and have a nice day.

Ladies and gentlemen, that does conclude the Preferred Bank second-quarter 2013 earnings conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 1-800-406-7325 with the access number of [4629862] (corrected by Company after the call). We thank you for your participation and you may now disconnect.