Preferred Bank
Q2 2013 Earnings Call Transcript

Published: 18 Jul 2013

[Operator:]

Good day ladies and gentlemen and thank you for standing by. Welcome to the Preferred Bank’s Second Quarter 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, Investor Relations for Preferred Bank. Please go ahead.

[Kristen McNally:]

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, 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 the 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.

[Li Yu:]

Thank you, good morning or good afternoon, and thank you attending our earning conference. I am very pleased to report to you our best quarter in the last five years. For the quarter, we earned a net income of $4.3 million or $0.32 per share; this is after taking into consideration accounted 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 30th continued to look quite favorable although in the third quarter we’re anticipating more than $60 million large payoffs but with the production record we have had in the last nine months we believe that at the quarter end loan is going to continue to increase, well mostly because of balance sheet management we able to hold, our net interest margin improved a little to 4.04% which adjusted by the interest that we’ve also talked about in our press release. Looking forward with the steepening of year curve, we believe that our long term main (ph) outlook is very positive; however, compression pressure remains for the next half of the year although it seems like moderating. Today 80% of the loan is on the floating rate, 14% of the loans is on the fixed rate, all the fixed rate loans more than half of it is covered by the deposits with equal or similar maturities, so our balance sheet is very asset sensitive and we’re pleased 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 merely negligible. Again looking ahead, it was at a reducing level of our NPA and with improving real estate value and with our conservative valuation of our nonperforming assets. We are very hopeful that future net resolution cost, if any, will be less than material at the worst. And our total nonperforming assets will reduce for the remainder of the year. We are also quite pleased with our improvement of the efficiency ratio. For the first hand, in many-many quarters it came down to less than 50%, actually it is 47.7%. This is largely because this quarter we have net reduction in the OREO expense which accounting includes some non-interest expense section. And because of that we feel that in the future there is room for moderate improvement. Compared to our peer group of California banks in similar size our share is currently selling at a discount to our peer group. I still remember about eight and a half years ago when we first go 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 saturation now. Now I am ready for your questions. Thank you.

[Operator:]

Thank you. Ladies and gentlemen we will now begin our question and answer session (Operator Instructions). Our first question comes from the line of Aaron Dorr from Sandler O’Neill and Partners. Please go ahead.

[Aaron Dorr:]

I have a couple of questions. First one is of course your reserves, you brought that down quite a bit and I am just curious what you’re thinking is on that, particularly just given notwithstanding what sounds like might be a little slower third quarter your growth outlook remains pretty good and so I was just thinking you might be looking to grow into that reserve rather than bringing it down?

[Li Yu:]

At this point in time, it is very positive; it’s very possible that we will have additional provision in the third quarter, in line with our loan growth. Our reserve was brought down in several reasons; and number one is that past five historical reserve is greatly reduced because, our methodologies, if you look at that period, has already passed, that heaviest loss we’ve suffered is 2009. So past five is going down. Number two is that, we have been aggressively charging off the specific reserve placed on each classified assets. So to this day, probably the total past 114 reserves relating to the picture is maybe over 10% of the total amount. So all of them is carrying at almost at niche cost. So that’s the reason it is coming down.

[Aaron Dorr:]

Okay, then the tax rate in the quarter seem to bump up much higher than what have been anticipated, there’s some sort of noise in there, that close down?

[Ed Czajka:]

Yes, Aaron its Ed. We have a couple of things that affected the tax rate for the quarter. The first was the true up of the 2012 tax returns versus the provision taken back in 2012, as they complete the tax returns, there is 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 123 R expenses, our benefits which is wonderfully 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.

[Aaron Dorr:]

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

[Li Yu:]

As I said we have not received the examination report yet. Okay, so this part of it, I would not be able to tell you that whether that we're in the position to immediately declare the dividend or not. In my mind as a large shareholder myself, I look at the bands we earned $4.3 million historically which should be, I mean declared by $0.10 dividend for that particular quarter. And I certainly would hope that they will come soon.

[Aaron Dorr:]

Okay. So not withstanding regulatory approval is $0.10 per quarter kind of your idea of what would be a good payout level.

[Li Yu:]

We usually pay off in the past is 20% to 35% of our earnings. So that's a historical number. And since the majority of the Board composes, I mean more people is about the same and that I like to think that I don't detect any change of philosophy at this point in time.

[Operator:]

Thank you. Our next question comes from the line of Gary Tenner with D.A. Davidson and Company. Please go ahead.

[Gary Tenner:]

Good morning. A question I supposed you said in terms of what you could say on this, some words on the dividend discussion. But, given the changes to any other loans that regulators have suggest to get added to non-accrual? What is your sense of that means for having your regulatory quarter lifted and enable you to pay the dividend at all.

[Li Yu:]

Number one answer is partially given earlier that at this point in time that we didn't have to report and there is a current law in regulation forbids me to indicate in any of the other specifics that was told to us on a verbal basis. And frankly it is also subject to supervisor review that report. So I don't know what the end result is coming up. But I have to be mentally prepared and that we're are not necessarily immediately able to declare dividends.

[Gary Tenner:]

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

[Li Yu:]

Our internal situation is always being not heading our loan close to like several other competitors goes to 100% or more. So that has been our internal policy before, and I think our policy is still something less that 100%, but it's the maximum we do. And Preferred Bank has always in the last 22 years, always try to grow the deposits first and loan the second. But deposits and loans it does not come sometime at the same speed. So certain quarters there were higher deposits production, certain quarter were lower. We certainly recognize in the last two quarters deposits increases has been slower than the loan increases. But fortunately we have lot of excess cash that was sitting in the excess cash liquidity. So far we're still very comfortable. But to make a long story short, we're working quite diligently on the deposit side. So (inaudible) to add on that.

[Ed Czajka:]

I think as Mr. Yu mentioned Garry that our priority is always to grow deposit first. So we have five account officers, the only focus on deposit generation. And we're also looking at certain particular special industry as well. 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 deposit to keep up with our loan payments.

[Operator:]

(Operator Instructions). Our next question comes from the line of John Deysher with Pinnacle Value Fund. Please go ahead.

[John Deysher:]

Couple of quick questions, one, on the examination report when do you anticipate receiving that and were there be the expectation that that were report will address the MOU situation or is that a separate discussion after you get the examination report?

[Li Yu:]

The answer to you is, I don’t know. It would be coming by our regulators.

[John Deysher:]

When do you anticipate getting the report? They’ve been there already, I guess.

[Li Yu:]

I wouldn’t know, I certainly hope is that it’s going to be sooner than later.

[John Deysher:]

Okay. And there may or may not be discussion of the MOU in that.

[Li Yu:]

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.

[John Deysher:]

Okay, understood. In you prior comment you referred to the statement in your curve and I think you said that, you're well positioned for a raising interest rates, 80% of the loans are floating I think you said 14% are fixed rate, what’s the other 6%, I know it’s only 6% but what were trolled into this 6% bucket.

[Li Yu:]

Well, I think the 86% is floating 14% is fixed rate that adds to be 100%. Of this 14% fix rate, we have covered more than 7% of it in with similar maturity deposits.

[John Deysher:]

Okay. So that’s how 86% is floating, 14% is fixed. And then on the MTA migration chart that you show with some discussion of trouble debt restructuring TDRs. What was the level of TDRs at the end of Q2?

[Li Yu:]

Well, I would like Louie answer that particular question; he is quickly opening up file.

[Louie Couto:]

It was not materially different. The TDRs were about 700,000 higher in Q2 than in Q3.

[John Deysher:]

Alright. But what was the absolute number? Do you have that?

[Louie Couto:]

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

[John Deysher:]

700,000 from Q1?

[Louie Couto:]

From Q1 to Q2, yes.

[John Deysher:]

And then finally, there was a line on the balance sheet which wasn’t there year end, investment and affordable housing, 5 million, it’s a small amount but I’m just curious what that is?

[Ed Czajka:]

That’s the investment in the low income housing tax credit, which we started in second quarter of this, we’re going to continue to make the 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 it’s about 63% of that asset that investment will also count toward CRA for the bank community reinvestment credit. So, that’s the new line item.

[John Deysher:]

What’s the risk there?

[Ed Czajka:]

Well, the risk is that the funded side from the developers that are going in and having the properties don’t perform. Obviously as you can imagine before we make an investment as this, we treated very much like a loan, we go through and do all due diligence we would otherwise do in any kind of a lending situation. The fund that we are involved with has, I believe they have done 159 funds so far; they had zero call backs in terms of tax credits, so we feel very comfortable obviously a lot of other parameters were looked at but those were kind of highlights.

[John Deysher:]

Have you invested with them before?

[Ed Czajka:]

No, we have not. But the number of the banks in southern California have and I’ve spoken with their CFOs regarding their investments.

[Operator:]

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

[Li Yu:]

Okay. As usual but we appreciate that your interest in the support of our Bank and as you can see every quarter that we have been improving our operating income, every quarter in the last number of quarters that we have been reducing our credit cost and efficient has been improving and that 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 like to reconfirm the feeling today and thank you very much and have a nice day.

[Operator:]

Ladies and gentlemen, that does conclude the Preferred Bank’s 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 1800-406-7325 with the access number of 4069862. We thank you for your participation and you may now disconnect.