Preferred Bank ( PFBC)

Q1 2011 Earnings Call

April 21, 2011 5:00 p.m. ET


Lasse Glassen - IR, Financial Relations Board

Li Yu - Chairman, President & CEO

Ed Czajka - CFO

Louie Couto – EVP


Andrew - Sandler O’Neill & Partners

Julianna Balicka - KBW

Joe Gladue - B. Riley

Joe Stieven - Stieven Capital

John Deysher – Pinnacle



Welcome to the Preferred Bank first quarter 2011 conference call. [Operator instructions.] I would now like to turn the conference over to Lasse Glassen of the Financial Relations Board. Please go ahead sir.

Lasse Glassen - IR, Financial Relations Board

Thank you, and good day everyone. Thanks for joining us to discuss Preferred Bank’s preliminary results for the first quarter ended March 31, 2011. With us today from management are Mr. Li Yu, chairman, president, and chief executive officer; Ed Czajka, chief financial officer; and Louie Couto, executive vice president.

Management will provide a brief summary of the quarter, and then we’ll open the call for 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 operations and business environment, all of which are difficult to predict, and many of which are out of the control of Preferred Bank.

For a detailed description of these risks and uncertainties, please refer to the documents the company files with the Federal Deposit Insurance Corporation, or FDIC. If any of these uncertainties materializes or any of these assumptions prove incorrect, Preferred Bank 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 now like to turn the call over to Mr. Li Yu. Mr. Yu?

Li Yu - Chairman, President & CEO

Thank you for joining us. Good afternoon. I’m pleased to report a first quarter profit of $700,000. It is small, but it is very precious to us in light of the large NPA we still have on our books. The first quarter of credit cost about $3.3 million is entirely limited to OREO. $600,000 was related to the sale or disposition of properties, and another $2.7 million is related to valuation adjustments or writeoffs.

On the sales side, the activity was satisfactory as we are netting $0.94 plus on the dollar. On the valuation adjustment side, it is unusually large and I will discuss this matter at a later time. Total OREO was reduced 25% between quarters.

We did not have much dollar amount improvement on our non-performing loans, although a whole lot of grunt work has been done. As I outlined in the press release, I do expect some reasonable activities and progress in the ensuing quarters.

Now, looking ahead, we now have a favorable net interest margin, which should improve along with the reduction of NPAs over time. We believe our costs are under control and the legal costs and ORU costs should further improve gradually along with the reduction of NPAs. And the new assessment formula for the FDIC insurance premium should also benefit the bank beginning the third quarter of this year.

Our capital is very adequate, and our liquidity is very satisfactory, but most of all, we retain a very, very loyal base of customers. So the only question we have right now is the credit costs in the future.

On the loan loss provision side, at this time I can only foresee a mild requirement for the rest of the year. This is partially because much of our construction loan portfolio is rapidly paying down. The proportionately large reserve that was assigned to this portfolio will be greatly reduced and released to be used by other loans.

However, having said that, we are always mindful of one element that we really have no control over. We still have a few shared national credit participation loans on our books, and it may surprise us in the third quarter, although we hope not. In any event, if it negatively surprises us, I still expect our total loan loss provision this year will be much, much milder than the previous year. Also, we may even be pleasantly surprised with the recovery of some of the loan losses that were previously charged off.

On the OREO side, I hope the future valuation adjustment will not be as severe as this quarter, although I can never be sure about the direction of appraisal reports. For instance, the March quarter’s valuation adjustment of $2.1 million, of $2.7 million total, is related to only one loan, for which the appraiser heavily relied on upon one comp that was an FDIC loss-sharing asset sale.

However, as of March 31, we only have four pieces of property with appraisal reports that are older than three months, but less than six months old. So we hope, and we think, we’re pretty much up to date with that.

On the business side, we booked roughly $70 million in new loans in the first quarter, but that was not enough because some of the [inaudible] outstanding, but that was not enough to offset the payoffs, paydowns, and the sale of the loans. So we had a net reduction in the first quarter of our loan portfolio.

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