Preferred Bank (PFBC) 2013 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Preferred Bank's Q4 2013 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session with instructions provided. If anyone has any difficulties hearing the conference (Operator Instructions). I would like to remind everyone that this conference call is being recorded. I will now turn the presentation over to Tony Rossi of Financial Profiles. Please go ahead, sir.

Thank you, John. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the fourth quarter and full year ended December 31, 2013. With us today from management are Chairman and CEO Li Yu; President and COO Wellington Chen; Chief Financial Officer Edouard Czajka; and Chief Credit Officer Louis 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 may be made by management that 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 wherever you are. I am pleased to report the fourth-quarter earnings of $5.9 million, or $0.44. This is the highest we have had in the last five years and certainly compares very favorably with last quarter and the quarter -- same quarter a year before.

During the quarter, we have good success in the disposition of our nonperforming assets. It reduced by $9.2 million, or nearly 40%. The most important part is that all of these dispositions resulted in a net gain of $2.2 million.

During the quarter, we took some precautionary moves or proactive moves to our investment portfolio. We sold some securities that we feel have the long -- I mean, (inaudible) the most sensitive to the long-term interest rate -- rising interest rate risk. For a loss. We also sought out the CBOs that will not be allowable under the Voelker Rule; although after the sale, the regulators may want to change their mind.

In any event, the CDO sales resulted in a $364,000 loss plus a $120,000 tax charge that was the result of reversing the ETA benefit (inaudible). Today, the Bank owns no CDO on hand.

We also did some proactive move in providing the loan loss. This quarter, we provided $1.8 million of loan-loss provision, which is probably $1 million to $1.2 million more than what would be needed to meet the gross provision needs (inaudible).

It seems extremely odd when you consider the disposition of nonperforming assets resulted in a net gain, but we feel there was the upcoming new rules under the FASB and also the various comments made such as by the Controller of Currency. There's a lot of uncertainties ahead of us within the methodology of calculating the (inaudible) loan-loss reserve. So we like to be little bit more proactive on that.

[Every] market is reviving or recovering. Other than the export activities, tourism that I mentioned in the press release, the most notable area is in the housing market, where we see the value have recovered a lot and the retail market. Three days ago, the Los Angeles Times had a full page on the business section reported that in the middle segment of downtown (inaudible) South Park, which is a little segment nearby Staples Center -- alone, 27 large-scale housing projects and retail projects that either already broke ground or are about to break ground.

We are very positive, very hopeful that the loan demand will be there in the future. Meanwhile, we're comfortable with $40 million in production in the fourth quarter when we take into consideration of the holiday period that always delays some of the closings.

Throughout the year, we also recognized that the short interest rate environment -- low interest rate environment may not be there forever, so we did some precautionary or proactive move. First of all, we made it a policy that we would not compete in the loan market for low long-term, fixed-rate loans. And for the fixed-rate loan we did -- for the fixed-rate loan we did under reasonable rate, we have tried to match about with the same maturity PCD deposits of Federal Home Loan bank advances.

Today, only 5% of our loan portfolio is fixed rate not covered by the same maturity deposits. And generally they are of a shorter duration, representing the legacy loans of the old years.

We think we're very well positioned for -- to take care to take advantage of the rising interest rate environment, it is going to happen soon. If not, we're perfectly happy to operate under our current net interest margin; that is because we also very -- have a very comfortable efficiency ratio.

Management team of Preferred Bank remain positive for our future; especially, we're very positive about 2014. Thank you very much. We're ready for your questions.

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

Question on the margin. How much of the margin compression that you had this quarter would you attribute to the excess cash that we saw in the quarter? I guess my kind of back of the envelope suggests that you guys could see a decent bounce back in the margin of 7, 10 bips or more.

Pretty much about 90% of it, Aaron, was due to the large amount of cash we had, and that basically took place during the balance of the quarter. Those balances came down a little bit at the end of the quarter. But during the quarter, the cash balances were quite significant.

That sounds like you should see a pretty good pickup then here in the first quarter.

Yes.

Aaron, just to add on, we probably will be very, very careful in applying these excess cash because it is still -- I still consider it kind of imprudent to putting in the investment portfolio at this time.

That's a good point. So my guess is that, to the extent that you are buying any securities, you're continuing to keep those pretty short especially given the loan growth opportunities that you have.

Yes. We are trying to find it. It's very hard to find the one that will not lose value as time goes on.

Right. Okay. And then Ed, on the tax line, I know there's a little bit of noise in there, but the effective yield for the year was around 39%. Did that seem like a pretty good run rate here on a go-forward basis?

Yes, Aaron, that should be a good run rate, maybe slightly below that. We may do another low-income housing tax credit project during 2014. That would have the effect of lowering that. Obviously depends on what time during the year we execute that. But I think that's a safe run rate going forward.

Okay. And then just lastly in your comment, Li, you had talked about the -- taken the prudent step of kind of boosting your reserve a little bit here. Is it likely that you continue to raise that reserve level in terms of the allowance as a percentage of loans, or are you comfortable with where it is here?

First of all, I'm comfortable as it is where it is right now because we do have a so-called -- I would call it unallocated reserve -- not specifically allocated to FAS 5 or FAS 114. But going forward, in our budget, we have made a little [more] -- I mean, stretching of the provisions as compared to our planned growth.

Great. Thank you very much. I appreciate you guys taking my questions.

Tim Coffey, FIG Partners.

I had a question about kind of your expectations for loan growth. I know you made comments in the press release, you said that business is seasonal (inaudible) that you mentioned that again on the call. But given the loan growth that you saw during 2013, was that mostly the low-hanging fruit, or do you see more opportunities out there?

I cannot quite see --

He wanted to know if that was the low-hanging fruit during 2013 in terms of loan growth.

No, we don't really think so because as you can see that throughout the year, they will be maintaining a net interest margin even on the margin compression environment as compared to many of our peer group where one of very few people was able to hold it. So we are not reaching the low-hanging fruit over there.

What we try to do is we have a very large production staff as compared to our peer group. And (inaudible) source a whole lot of more deals. And generally speaking that we'll only do deal that meets our underwriting criteria first and also meeting our year criteria the second.

Okay, okay (multiple speakers).

Sorry, Tim. You weren't coming in very clear, Tim. That's why we difficulty here (inaudible), and thank you.

Then I'll step back. Thanks.

Gary Tenner, DA Davidson.

Good morning. Just a couple questions. First on the excess liquidity and really as it relates to (inaudible) deposits towards the end of the year. Have you seen any additional outflow over those deposits early in 2014, or have they remained at the bank?

We see the normal outflow roughly about the $20 million -- or $20 million to $30 million, and a part of it has already flown back. Okay? It's very traditional -- and (inaudible) the small company like to write the check at the end and clear it in the early part of the quarter. Okay? And gradually start to build up in the situation. Actually, we anticipate at March 31 there will be some buildup, and April 15 there will be some quick reduction because tax situation coming. It's in and out, but we are happy that the outflow is very limited, not abnormal.

Okay. Thanks for that. And then just I wonder if you could update your progress on the regulatory issue on the, I think the, Bank Secrecy Act and kind of what you've done on that end and whether we should think about any costs in 2014 related to, you know, beefing anything up on that side.

Well, all the costs that was related to that particular aspect, we think we have already in fact occurred in the second half of the year. Whatever additional costs is in the future is will not be very significant. And as -- however, we treat this matter as the utmost importance. So in the case as necessary, we're spending a little bit more, but would not be that significant.

Okay. Thank you.

(Operator Instructions) Joe Stephen, Stephen Capital.

First of all, congrats on another very good quarter. My question was sort of going to dovetail on Gary's, which was just to give us an update on the regulatory side what you just asked about. And then what about when is the next full scheduled exam for you guys?

First of all, I mean, you have to forgive us that you know that when it comes to regulators, (inaudible) to be there's certain limitation of what we can say. Okay? So having said that, the next scheduled examination, the last we know is July 7.

Okay. And then right now, you're -- you just tell us the regulatory -- if you have any regulatory agreement right now, Li.

We still have been MOU technically, yes. And we are operating with the very various requirements on the BSA and other things on that, although internally we feel we are very diligent in complying to that.

Okay. Okay, thank you, and very good quarter then, gentlemen.

John Deysher, Pinnacle.

Following up on the last question, when is your next comprehensive regulatory exam? Is it this spring, or what (multiple speakers)?

July 7.

Okay. July 7 of 2014?

Yes, they will arrive here. That's the last we know. You know, you see, they can change their dates. Okay?

Okay, but that's where we are now?

Yes.

Okay, good. And then Mr. Yu, in your prepared remarks you referenced some major development close to the Staples Center; I guess several housing projects, maybe some retail. Are you then lender on any of those?

We are a lender on a very small portion of that. Okay? We are getting -- I guess being a very small bank in a very big market, we are having our shares of the market.

Okay. What type of loans are they, and what is your dollar exposure there?

Oh, our total dollar exposure on these new activities, where a lot of the old (inaudible), the new activity is no more than about $10 million to $15 million.

Okay. And those are condominiums or retail or what type of property?

Some are the apartments, some of the retail, some of the condominiums. And some very, very, very hard-to-find parking lots. Parking -- if you are in New York, you know how valuable is that, right?

Yes. No, we understand. Do you envision that amount going up significantly? (multiple speakers)

We are subject to huge competition. Some of those projects are very, very large. It is out of our legal lending limit and will not be offered by these banks the opportunity to participate. Or we have a rate we do not care to participate. But to the extent that we will be -- try very hard resourcing with many of the customers where we have relationship is because we consider that's a very good growth area.

Okay. Because I think we got into some trouble with this through the last cycle, and I just want to make sure that --

Well, funny thing in real estate is what was last as being trouble now becomes heaven for many, many people that making huge amount of money. You know?

Okay, all right, I got you. Thank you.

And I show no other questions at this time. I would now like to turn the call back over to management for closing remarks.

Well, thank you very much for your interest. We're just very pleased that the Bank is able to make -- increase earnings six quarters in a row, okay? And we're hopeful the trend will continue, and then we are very positive about the outlook for the market and for ourselves. As I said, we're perfectly happy in operating in the current environment with our current net interest margin and the current low efficiency ratio. But if the rate is going to be increasing, we are ready to take advantage of that. Thank you very much.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for your participation, and you may now disconnect your lines. (technical difficulty)