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Preferred Bank (NASDAQ:PFBC)

Q4 2011 Earnings Call

January 26, 2012 5:00 pm ET

Executives

Kristen McNally - IR

Li Yu - Chairman, President and CEO

Wellington Chen - COO

Ed Czajka - CFO

Louie Couto - CCO

Analysts

Joe Gladue - B. Riley & Company

Joe Stieven - Stieven Capital

Gary Tenner - D.A. Davidson

Operator

Welcome to the Preferred Bank's fourth quarter 2011 conference call. (Operator instructions) This conference is being recorded today Thursday, January 26, 2012.

I would now like to turn the conference over to Kristen McNally, Investor Relations for Preferred Bank.

Kristen McNally

Thank you. Good day, everyone, and thanks for joining us to discuss Preferred Bank's preliminary results for the fourth quarter and full year ended December 31, 2011. With us today from management are Mr. Li Yu, Chairman, President and Chief Executive Officer; Wellington Chen, Chief Operating Officer; Ed Czajka, Chief Financial Officer; and Louie Couto, Chief Credit Officer. Management will provide a summary of the quarter and then we'll open 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 that the company 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.

Li Yu

Thank you very much. It gives me great pleasure to report to you that after a very difficult 2009 and 2010, we are reporting $3.8 million profit for the fourth quarter and $12.2 million net income for the year of 2011. More importantly, we have four quarters of continuous increase in profitability. Largely, this is the result of continuous moderation in credit cost and most importantly improvements in our operation.

Now, during the fourth quarter or more precisely the later half of 2011, we have made some progresses in our deposits and in our loan portfolios. For the fourth quarter, loan increased about $48 million. Almost entirely that amount is related to C&I loans. These loans yield less, but gives more deposits balances and therefore does not affect the net interest margin as much. And on the deposit side, we increased about $43.8 million or $44 million with about two-thirds of the increase in the core deposits.

Looking back, compared to where we are one year ago, I really want to point out that for the year, other loan only increased $37 million. But considering the reduction of non-performing loans, our total interest-earning loans are now over $900 million.

Deposits although show only a 3.5% increase, a $2.36 million increase, but it is composed of $117 million increase, a 30% increase in core deposits and was offset by the reduction in time deposit, basically the paying of the broker deposits. And during this year, we improved our net interest margin 96 basis points.

As of December 31, we are fully in compliance with regulated guideline of less than 100% construction and land development loan or less than 300% in total of CRE loans, which makes us one of the very few banks able to achieve that in the Greater Los Angeles area.

All this time, our capital ratio increased 136 basis points. Now, this is all accomplished during the year that we're busy in resolving our non-performing credits. But we are pretty mindful about going out business and improve our balance sheet.

Looking ahead, even though we realized fourth quarter resolution of non-performing assets, it has been slowed down by the holiday season and by the economy. Looking ahead, we're fully confident that we will make further reductions in non-performing assets until probably a relatively insignificant level toward the end of the year.

Meanwhile, we will continue to make improvement and advancement in our loans, in our deposits, in our efficiencies and most importantly in our profitability.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Joe Gladue with B. Riley & Company.

Joe Gladue - B. Riley & Company

Wanted to ask a little bit more on the loan growth, very nice loan growth. But what does the pipeline look like going forward?

Li Yu

Well, I would defer the particular question to Wellington Chen. Wellington, would you answer that?

Wellington Chen

Sure, we're off to a good start for January. Our pipeline looks very strong. As you know, we have frontline lenders who are then involved working on the asset resolution and at the same time to make sure that we're bringing the productive C&I lenders and to build on our future as well as the core commercial deposit.

So because we are off to a very good start last year already. And this year as our problem asset continue to wind down, that will leave more of our frontline producer who are very capable and reputable producers in the past to add to our production team. So this year looks very favorable. And I think that so far in January, we are off to a very good start.

Li Yu

Let me interject a little bit, Joe. I'd like to point out that we have vibrant pipeline. However, my personal prediction at this point of time, the first quarter increase will not be as big as the fourth quarter increases. For the simple reason, we have several resi large loans scheduled to be paid off during the first quarter. So we think we'll make additional increases, but not quite as the magnitude of the fourth quarter.

Joe Gladue - B. Riley & Company

There is a little bit of decrease in the single and multi-family residential. Is that something we should expect to continue or were there just a lot of loans refinanced away?

Li Yu

We do have some reduction in the multi-family, because that has been the focal point of the big banks. We know that financing them at one-year LIBOR plus 175 basis points, it puts us at an uncompetitive situation. Some of them will be financed away. But we do intend to protect them as much as we can.

Joe Gladue - B. Riley & Company

On a different subject, where did the performing TDRs stand at the end of the year?

Louie Couto

Yes, performing TDRs were $16 million, which is down from last quarter. As a result, we were able to successfully negotiate some cash payoffs of some performing TDRs.

Joe Gladue - B. Riley & Company

And I guess ask for a little bit of comment on the net interest margin. We're able to generate a good bit of loan this quarter. But if loan growth is a little slower next quarter, I guess that would suggest that more of that would be going into securities portfolio, more of the deposit generation would end up going into the securities portfolio? What are your thoughts on the net interest margin?

Louie Couto

Well, obviously as you saw the margin, it was fairly flat compared to the third quarter. I think it was down a little bit just because we had a few extraordinary items in Q3, Joe, looking on a linked quarter.

Going forward, I don't see a lot of change in the margin other than the change that's going to result from growth on the loan and deposit books. With $140 million cash on hand that we have on the balance sheet, certainly we wouldn't mind a little period whereby loan growth outstrips deposit growth. Obviously, we're not designing it that way, but it happens that way. So be it. And obviously that would add to the margin going forward.

As I said, we are getting a little bit of incremental pickup as the older legacy CDs mature and renew it at the lower rates. And of course to the extent, we are going to be generating new loan credits and using cash to do that. Obviously, we will expand the margin as well. But looking out into 2012, we see a little bit of margin expansion, Joe, but not anything significant at this point.

Joe Gladue - B. Riley & Company

Any big chunks of CDs or other funding that's rolling over in the first to second quarter?

Louie Couto

Yes, we have $26 million of senior debt guaranteed by the TLGP program that will be rolling off, and that's almost a 3% cost on that. So we are looking forward to that.

Operator

Our next question comes from the line of Joe Stieven with Stieven Capital.

Joe Stieven - Stieven Capital

Most of my questions have been asked, but I do have a couple of more. Number one, you had a small amount of the reversal of the DTA. Can you give us your total allowance now on your DTA? That's question number one.

Louie Couto

The total allowance on the DTA, Joe, I believe is about $21 million. So total allowance remaining is about a little over $21 million.

Joe Stieven - Stieven Capital

I see a number of banks recently bringing on their entire allowance back after less profitability and less improvement in asset quality. I'm scratching my head a little bit. I mean, Ed, can you just talk about that?

Li Yu

Joe, can I answer the question in the most facetious way, because we are examined by one of the most reputable, most experienced CPAs KPMG. So the slated recovery may be slightly later than other banks.

Operator

Our next question comes from the line of Aaron Deer with Sandler O'Neill & Partners.

Unidentified Analyst

Hi, guys. It's actually Andrew for Aaron. I am just curious if you can talk a little bit more about your expectations from improvement in credit quality just like what's happened since maybe yearend as you entered into agreements to dispose of some properties, that sort of thing.

Louie Couto

Actually, as you know, before the Super Bowl, kind of the last half of the year before the Super Bowl, it's kind of tough to get people to negotiate and seriously work to get things done.

At last half, we had well over half of our ORE under contract. And unfortunately, with the European debt crisis and some inability to make the decision to close that were still out, we're still under negotiations and discussions with a significant portion. But at this point, we are not at a position that we're going to be able to give you some comfort as far as any large reductions in the first quarter.

Unidentified Analyst

And then here sitting maybe talk about the level of non-performers and any expectations of them to become back to performing status.

Wellington Chen

It's well over 25% of our non-accruals that are fully current. And in fact, when we say fully current, some of them are actually 30 to 89 days past due, but I'm talking just fully current is well over 25%. And we have an expectation throughout 2012 that if that continues, we will be able to put those back on accruing sales.

Operator

Our next question comes from the line of Gary Tenner with D.A. Davidson.

Gary Tenner - D.A. Davidson

I missed your comment on the (OTCPK:TGLP) debt which was over 3%. What's the timing on that?

Wellington Chen

Next month, February.

Gary Tenner - D.A. Davidson

In terms of the lenders that you were talking about, did you actually bring any lenders during the fourth quarter or are those folks that you brought on earlier in the year?

Li Yu

During the fourth quarter, we brought in two C&I lenders.

Gary Tenner - D.A. Davidson

And did you bring them in from an agent niche bank as well or from an institution?

Li Yu

From mostly local Asian bank who has expertise in mainly C&I lending.

Operator

There are no further questions in queue. I'd like to turn the call back over for closing remarks.

Li Yu

Thank you very much. The entire management and our Board Directors facing 2012 with a lot more confidence and lot more good feelings about it as compared to ever before. We're pretty sure that the improvement that we have made in our operation will continue in all aspects. Thank you very much for your attention. Thank you.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. If you'd like to listen to a replay of today's conference, please dial 303-590-3030 or 800-406-7325 and enter the access code 4505999. We'd like to thank you for your participation and you may now disconnect.

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