Preferred Bank (PFBC) Q1 2013 Earnings Report, Transcript and Summary

Good day ladies and gentlemen and thank you for standing by. Welcome to the Preferred Bank’s Q1 2013 Earnings Conference Call. During today’s presentation all parties will be in a listen-only mode. Following the presentation the conference will be opened for questions. (Operator instructions) I would now like to turn the conference over to Kristen McNally, Public Relations for Preferred Bank. Please go ahead ma’am. Kristen McNally – IR: Thank you. Hello everyone and thank you for joining us to discuss Preferred Bank’s financial results for the first quarter ended March 31, 2013. With me 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’d like to turn the call over to Mr. Li Yu. Please go ahead.

Good morning or good afternoon. Thank you for joining our earnings conference phone call. We are very pleased to report to you our best quarter in the last three years. For the quarter, we earned a net income of $4 million or $0.30 per share all from operations and all recurring. During the quarter our loans continued to grow at the pace of little less than 15% annualized. Our deposits also grow at the pace of 8% annualized. Although we might note that we have given up $60 million of DTA voluntarily due to that it would require security collaterals. During the quarter, we produced or we originated $150 million in new loans, it was roughly $100 million outstanding at the quarter end, but the payoffs also are very high. We have choose not to match some of our customers received offers which will require us to do low fixed rate loans at long durations. Pipeline at this time looks very good. Although payoff – scheduled payoff also looks high but net-net we forecast that the second quarter to have continuous flows in our loans portfolio. We have in this quarter maintained or even improved our net interest margin a little bit. The improvement largely comes from EBITDA leveraging, a slight decrease in interest cost and the acceleration of the realization of deferred loan fee income due to the early payoffs. But we are listed and we are prepared that in the next several quarters, our net interest margin may reduce due to – we are still in the mid of assets repricing weak. But we will try very hard to keep the reduction or keep the decrease very mild. Assets quality continued to improve. For the quarter, we have a very meaningful reduction in OREOs and NPLs. Again, looking forward, we see nominal or in the very unlikely case that there may even a very small increase in total NPAs in the second quarter. However, we do see whole lot of resolution is scheduled in quarter number three and we do believe by the year end, total NPA will be reaching a very significant level. OREO cost is likely to moderate much further. As of today, most of our OREOs are carried at 80% or less of the appraisal value. With the continuous improvement in our California housing pricing, real estate prices, we are very optimistic that the OREO cost will moderate. For the quarter, we did not make any provisions for loan losses because we have a $2.1 million loan loss recoveries and which is adding to our already very adequate loan loss reserve. It wasn’t for this recovery we might exactly got small provisions but as it we are very pleased to have this recovery. Looking forward, I would like to reiterate our entire team’s optimism about our future. We think we can continue to grow our bank, continue to improve our operation and continue to improve our profitability. Thank you. Now we are ready for your questions.

Thank you. (Operator Instructions) And our first question comes from the line of Aaron Dorr from Sandler O’Neill and Partners. Please go ahead. Aaron Dorr – Sandler O’Neill and Partners: Hi, good afternoon guys.

Hi, Aaron. Aaron Dorr – Sandler O’Neill and Partners: I guess first, Li, did I hear correctly did you say that you had an anticipated increase to the NPAs during the second quarter?

We say, in the very unlikely case okay, I mean, in the resolution there may be a gap in certain things. Chances of happening, we think generally probably it will be a nominal decrease in our NPAs next quarter. Aaron Dorr – Sandler O’Neill and Partners: Okay, so there wasn’t anything you had identified. It’s just in the normal course?

There are some weaknesses always in some of the loans. I like to not to be too optimist – it sounds 1000% optimistic. Aaron Dorr – Sandler O’Neill and Partners: Okay, that’s fair. And then I was wondering with the loss of the deposits that resulted at the TAG program, was that from a single customer that the $6 million or how many customers is that right across?

It’s from a whole bunch of customers. There are some governmental deposits, some banker’s deposit, Ed, do you want to add color to that?

Yes, well, it’s a number of programs, Aaron that required collateralization up and above and beyond the $250,000 per account level and so, we chose to get rid of some of those very, very large ones. We did feel it’s – what’s prudent to us to continue to collateralize to our DTA accounts. Aaron Dorr – Sandler O’Neill and Partners: Okay. And then, thinking about the margin, you mentioned that you’ve got a high level of scheduled pay-offs come in.

Yes. Aaron Dorr – Sandler O’Neill and Partners: What is the – what kind of rates are on though it’s relative to where you are putting on new production?

I can only generally tell you that this pay-offs will be at a higher rate than loans that pay-off carries a higher interest rate than on new loan productions in general. Aaron Dorr – Sandler O’Neill and Partners: Okay and is there – how do you view your current level of excess liquidity that might be deployed to help offset some of those pressures?

It maybe, obviously that’s one of the – if you just want the mathematics, our net interest margin should be growing, we would do that, but our job is also grow our deposits. So, the priority is grow deposits regardless of the calculation of net interest margin. But more concentrate on improvement of net increase income. Aaron Dorr – Sandler O’Neill and Partners: Okay and then just one more I guess, with respect to the margin outlook. Can you identify what the impact to margin-wise of prepays in the first quarter? The prepayment penalties, to clarify.

We generally do not have much prepayment penalties.

Are you referring to deferred loan fee?

That will be one deferred loan fees. Aaron Dorr – Sandler O’Neill and Partners: Okay, that was what you are referring to?

Yes, that he was referring to, right. Aaron Dorr – Sandler O’Neill and Partners: Okay. Fair enough. I think, I’ll step back, see if there is other questions.

Thank you and our next question comes from the line of Don Worthington from Raymond James. Please go ahead. Don Worthington – Raymond James: Good morning everyone.

Hi. Don Worthington – Raymond James: Couple things, in terms of just the tax line, I know you had some adjustments for the fourth quarter. Would you expect anything there for the first quarter in terms of once you get the final number?

No, Don. We don’t expect any change at this point. The difficulty with the year end was that, we were coming out of the year with as you can recall, we had a lot of noise to it. We had a pretty much a full DTA valuation reversal in Q1 and then you had a slow lead off the little bit remaining valuation allowance over the next three quarters and then we had a lot of issues with respect to getting the DTA back on line. So, it required a number of adjustments and we had also changed our tax accounting same here as well. So that added a little bit to it. But, we don’t expect anything in the foreseeable future or this quarter at all. Everything is basically fully taxable now and it’s fairly smooth. Don Worthington – Raymond James: Okay, great. And then in terms of the non-interest expense line, anything in the first quarter that you would consider non-recurring trying to get towards a run rate for a non-interest expense going forward?

Well, we would generally project that OREO cost okay, charges will reduce. To what extent that would reduce, that at this point of time it’s unclear, since we carry our assets on the very conservative value basis, we would like – it will be reducing in fairly good pace. Don Worthington – Raymond James: Okay, and then was there like a bonus accrual or anything in the first quarter that resulted in the increase from the fourth quarter in terms of total non-interest expense?

Yes, we had a number of things on the salary line item, Don, bonus accrual was one of them. Obviously, as you recall, our bonus plan is tied to profitability. That can reach certain ROE benchmarks, so as that increases, the bonus expense will increase. As it compares to the same quarter last year, Don, staffing levels are certainly higher than they were last year because of the branch this year we did not had last year in addition to a number of business development people. Don Worthington – Raymond James: Okay, and then it looks like there was some good progress in disposing or OREO, particularly in the land category. Does – is that reflective of just better prices on land in Southern California?

Yes, definitely. But I have Louie give you more color in that sector.

Yes, actually thanks for picking up on that. The four different parcels we actually closed in the first quarter were all land. Additionally, we have another three pieces of OREO currently in Escrow, which Mr. Yu alluded to, but those are primarily scheduled to be closing in the third quarter. We have another one under contract. We are anticipating it into Escrow soon. But again, that will probably a third quarter event. But we have noticed an uptick in traffic as far as qualified buyers and in – and building a willingness to close on Escrows. Don Worthington – Raymond James: Okay. Great, thank you.

And our next question comes from the line of Gary Tenner from D.A. Davidson. Please go ahead. Gary Tenner – D.A. Davidson: Good morning.

Good morning Gary. Gary Tenner – D.A. Davidson: You guys have continued to do a great job in terms of loan reduction I think you mentioned $150 million this quarter. In the past you talked about getting some customers back that have left the bank in terms of more default times. Can you talk about how much of your loan production this quarter maybe was – customers coming back to the bank versus brand new customers and just other drivers of some of that reduction?

Well, I would have Wellington answer the question, okay and we may add something to it little bit later.

I think, for the first quarter, the ratio was about 65:35, 65 new customers to the bank and 35 the previous customer that came back. Is that what you are looking for, Gary? Gary Tenner – D.A. Davidson: Yes, that helps. And then just, I guess, with the loan growth being as strong as it is, I mean, any detail you can provide in terms of where there was any particular pockets of growth or how do you guys have been successfully driving the loan growth faster than your peers?

Well, one of them is that we opened our San Francisco branch in February. So we are – here we have a couple of relationship managers up there and another one due to arrive at the end of this month. That helps with the people we hired out there has been to local community for over 20, 25 years. So they are very well known. And as well as down here, we continue to drive C&I business and on the real estate side, as Mr. Yu mentioned it’s very competitive but, I think that we are building on the relationship on our network basis. So it’s a pretty good combination of C&I and CRE, pretty much the 50-50. Gary Tenner – D.A. Davidson: Okay and just moving into the San Francisco branch, what kind of loan production or bookings today post during the first quarter?

They have done some, pretty much, I think they have some import export business. Real estate owner user apartments. Gary Tenner – D.A. Davidson: And in terms of dollars, could you tell us what kind of production you got from that?

About $27 million. Gary Tenner – D.A. Davidson: 27?

Yes. Gary Tenner – D.A. Davidson: Okay. All right, thank you.

(Operator Instructions) Our next question comes from the line of Joe Stieven from Stieven’s Capital. Please go ahead. Joe Stieven – Stieven’s Capital Advisors: Good afternoon guys.

Hi. Joe Stieven – Stieven’s Capital Advisors: First of all, good quarter. Couple of my questions were already answered, but let me restate this one. On the regulatory side, can you give us any type of updates that just because obviously you still mentioned and you got your thoughts about the MoU on page five, I think, so just any updates? Thanks guys.

We are under examination right now. So the examination results has not been finalized. But based on the progress we have had, I can only say that this examination is tougher than 2009. Joe Stieven – Stieven’s Capital Advisors: Okay. Good and your performance have been great. Thank you, guys.

Thank you and our next question comes from the line of John Deysher from Pinnacle. Please go ahead. John Deysher – Pinnacle Value Fund: Hi, everyone.

Hi, John. John Deysher – Pinnacle Value Fund: On the last question about the MoU, is it still the intention to perhaps reinstate the dividend assuming you pass the exam and have the MoU removed that’s still on the table?

John, I will relate this to you that from the consensus opinion of our Board, the minute that we are allowed to do so, the minute we will reinstate dividend. John Deysher – Pinnacle Value Fund: Okay. I think on the last call, you indicated the dividend might be reinstated at a 25% to 35% payout rate. Is that still…

That’s historical number before the crisis what we have been doing. Before we do so, certainly we’d like to be a responsible bank going over our entire capital plan and we come up with a number to see what the payout ratio is in doing that and also while doing that we have to measure other requirements of capital. But certainly sounds within the range. John Deysher – Pinnacle Value Fund: Okay. Or presumably you are doing all of that planning now, so that once the MoU is lifted you can act pretty quickly.

That seems like that – is, speaking for me personally, I do need a dividend for myself too. So, it would be my personal interest. John Deysher – Pinnacle Value Fund: To go ahead with the dividend?

Yes. John Deysher – Pinnacle Value Fund: Okay. Thank you.

(Operator Instructions) And I show no further questions in the queue at this time.

Okay, well, thank you very much for your interest and we will talk to each other hopefully three months from now. Thank you.