Preferred Bank (PFBC) 2014 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Preferred Bank's Q1 2014 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. (Operator Instructions).

I would also like to remind everyone that this conference call is being recorded. I will now turn the presentation over to Kristin Papke, investor relations for Preferred Bank.

Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the first quarter ended March 31, 2014. 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 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 related 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 would like to turn the call over to Mr. Li Yu. Please go ahead.

Thank you, good morning. For the first quarter of 2014, our bank earned $5.2 million or $0.38 per fully diluted shares.

For the first quarter, we have loan increases of 3.5%, which equal to roughly 14% a year. The number is slightly more encouraging than that if you take into consideration that there were a $2.2 million reduction in nonperforming loans that was converting to performing, and because of the increase about 2.1%.

We look at the loan increases and basically it's evenly divided between the C&I and the CRE. On the deposit side, the increases almost exclusively conform the increases in PCDs. Now, it is quite normal for the first quarter we will see our DDA to decline as a result of income tax and other operating cycle situations.

But as to why there is a large TCD increases, since we have lowered somewhat our TCD rate and we have not renewed a number of maturing TCDs we are -- we don't really have a good answer. But it was a very pleasant surprise to me.

Pipeline today on the loan looks fairly stable and looks quite decent, and we believe that a similar result or increases can be achieved in the second quarter.

In the first quarter, net interest margin actually improved 2 basis points, even though I have stated in the press release they [went] under margin erosion pressure. Increased margin is partially because of the limiting factor as we are materializing more cash, more idle cash of our bank.

For the first quarter, fully reflects that substantial increase in our supporting staff level that we have been building up since the second half of last year. Today we believe we have completed that staffing situation with maybe short of one or two persons.

Actually, we do not -- we believe we have been pre-investing into the future with the need of administrative and compliance function sets in the bank. So going forward, we do not see any similar increases in the staff levels as compared in the past.

All in all, we have a quarter that is fairly close to what we anticipated. And we are very happy with the efficiency ratio of the bank, and we think we can continue to maintain that for the remainder of the year.

Now, at this point, we will welcome your questions.

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

Mr. Yu, in your comments, you mentioned the stability within the pipeline. I'm curious; does that reflect the historical strength that you have typically seen in the second or third quarters? Or are you looking for something more in line of a flat level of growth with what we saw?

Well, actually, it is very difficult to anticipate very final detail about 1 or 2 percentage point changes in the whole situation. But, having said that, traditionally -- and I don't know why -- our bank usually sees a more increased level of loan pipeline in the second and third quarter as compared to the first and fourth quarters. There is especially true in the fourth quarter, although the pipeline seems to be still healthy, but the closing has been affected by the holiday season.

Having said that, historically, we always the second quarter and third quarter reflecting increased deal flow. And I think that still holds true at this point in time.

Okay, right. And, Ed, maybe you can help with this one. Do you by chance have the yields on the loan book in the first quarter and then also in the fourth quarter? Then, I am curious where the current loans are being added relative to the average.

Yes. Average loan yields for this quarter, Aaron, were 5.20%, and for the fourth quarter of 2013 was 5.29%. We had about a 9 basis point sequential quarter decline. And then, for the fourth -- first quarter of 2013, the book yield was 5.32%, so still fairly moderate declines.

Okay. And do you -- by chance in terms of what -- the new production that came on in the first quarter where -- what kind of average yield was on those?

Aaron, the average yield on the first quarter loans is [four point above -- 4.9, over 4.9].

Gary Tenner, D. A. Davidson.

Wonder if you could provide any color around the magnitude of loans that you think lost on the pricing side this quarter and how that might compare to the last couple quarters?

The number -- the loans that paid off average yields [of about 5.07%], weighted average.

Sorry. That is the yield of what paid off?

Gary, were you referring to deals lost that we otherwise would have done or are you talking about the payoffs?

I am talking about payoffs where there has been some -- were there has been credits refinanced out of your bank by other banks, how the volume or magnitude of those loans compared to the last few quarters. Has it gotten worse?

It is about similar (multiple speakers) to the previous quarter.

Okay. And then, on the trade finance fees, quite a nice bump there; I imagine there is some seasonal benefit there to where we should back off again. Or was there any kind of unusual there?

Actually, trade finance fees were increased by a couple of those standby LC fee we issued with an annual income level of about 1%. Okay?

Now, I want to get back to the question that Aaron raised earlier as far as the loan yield booked in the first quarter that we reported as [4.9%] as compared to the loan yield in the [fourth] quarter of last year. If you noticed, the first quarter loan increases are basically evenly divided in C&I and the CRE. And our total loan portfolio is 70% CRE and 30% C&I.

And so the first quarter immediately skewed toward the C&I, which carries a lot lower coupon rate as compared to the CRE, the actual CRE erosion probably in this 4 to 6 basis points range, as I roughly estimated it.

Tim Coffey, FIG Partners.

Given the comments on how the staffing levels, if we were to look at the noninterest expense line item, is that a good run rate for right now?

Yes, it is a pretty good run rate right now, except there are two factors, okay? One factor is that we are thinking about opening up a Valley branch that we will be pretty soon we will be sending the application to the government to let us open a San Fernando Valley branch, which will increase the staffing.

And, number two, there will be some continuous opportunistic hiring of production people that show the historically good achievement and would like to get hold of them, okay. With the other two factors, the third factor is that we have accrued in the compensation expense based on our earnings level. As our earnings increases based on our bonus plan, there will be increased compensation expense. So, with these factors involved, all other items seem to be -- including the back of office supporting staff, this seems to be a sense of pretty much stable.

Okay. If everything goes according to plan, when would you start recognizing expenses on the San Fernando branch?

Well, we probably, at this point in time, it is beginning of the third quarter.

Okay. And is there any planned hiring in the next couple of quarters? Or is that just kind of as the opportunity arises?

As the opportunity arises.

Okay. And then, looking at the dollar value of the interest expenses, have you gotten to the point where you need to start paying up for deposits to fund the loan growth?

Tim, we haven't actually found that to this point. As a matter of fact, ironically enough, in the first quarter we lowered a lot of our deposit rates -- our offered deposit rates across the board, simply because we have been building up so much cash on the balance sheet, we kind wanted to moderate that.

And so what we saw in terms of -- you can see what happened in terms of our CDs. As Mr. Yu alluded to, DDAs went down as a seasonality issue. Money market increased a little bit, but we also decreased our money market rates as well.

So despite all of that, we are still seeing decent growth. Obviously, we will be coming back to the market and probably will raise some of those offered rates in probably the latter part of the year, but at this point, we don't see the need to. If we can continue to grow, certainly, this would be the way to do it.

And we are actually starting to see, month to month, some of our deposit cost working out. If you look at fourth quarter last year, first quarter this year, we did see some of our deposit cost overall tick up a little bit, which is the first time in a long, long time. But what we did in the first quarter in terms of moderating some of those offered rates, we are starting to see that trend reverse itself a little bit.

Okay. Okay. And then, [speaking of] the cash as a percentage of earning assets, or as a dollar value, is there a level you want to bring that down to?

Well, it is really, really, very hard to say. There is -- mathematically, it is kind of difficult to do because the first thing we would have to consider, what is the growth rate of our loans. The second situation is, as I have stated many times, there is really no deposit pipeline. We just have to guess what the deposits gathering is in the upcoming quarter.

And, finally, important situation is interest rate management. If excess cash after these two factors being considered, how much do we want to invest in securities, given the possible interest rate increase in the future, do we just sort of buy insurance and stay at the current level or do we start to deploy our cash? It is almost a weekly function, if not daily function, that we are looking at continuously.

Would you feel comfortable holding cash north of $150 million or is that just a (multiple speakers)?

Well, in the near-term that cash [in what is going to be $50 million] it seems to be okay. Any time between the level -- between $100 million to $150 million is kind of comfortable.

(Operator Instructions) John Deysher, Pinnacle.

On the asset quality side of the release, there shows a $3.3 million migration from nonaccrual to OREO. What type of property was that?

I will let Louie answer that.

Good morning, John. Yes, that is land -- entitled land.

Entitled land ready for development --

Residential housing.

I mean, that is situated in a fairly reasonable area in greater Los Angeles area. This is after two years of legal battle and fighting through seven -- six different bankruptcy attempts to try to stop us from doing that, we just got it.

Okay. Well, congratulations on that. Do you anticipate putting it up for sale? And do you anticipate (multiple speakers)?

It is up for sale and, in fact, there are parties looking at it. But, of course, until a deal is done it is not done.

Okay. It is listed more than the carrying value of $3.3 million?

It is.

Okay. And there was an addition to nonaccruals of approximately $1.2 million. What type of loan or loans were those?

Those were -- it was two loans, both are real estate secured. And there were events outside of the property itself that caused issues with their repayment.

Okay. But they are not current right now?

That is correct.

And what is the outlook for those properties?

Again, we filed notices of default and we are pursuing a trustee sale. And then we either -- they are acquired by a third-party at the trustee sale, as has happened to us seven times in the last couple of years, or we are successfully able to foreclose and then we market those for sale as well.

Okay. That makes sense. And then, finally, you guys have been reluctant to participate in any of the South Park development, which is, I guess, a really rotten neighborhood out there. Is that still the case? Are you dipping your toes in the water at all in that marketplace or any other areas that are subject to development at this point?

You know we are -- John, thanks for the question. It is Louie again. We are constantly looking at our concentration levels, looking at where our loan exposure is and evaluating if it makes sense for the bank. And we do that through our board committees and at the senior management level.

We have tended to not want to dip our toes there too much. It would have to be something that would really make sense for us to do, and we have not found that to be a compelling -- we have not found the compelling reasons to really go into that at this time.

So you are not in that market right now.

That is correct.

And we seem to have no further questions at this time. I will turn the call back over to management for any closing comments.

Well, thank you very much. I think we hope that our balance sheet is kind of very transparent. Operations kind of very focused, very simple. And that we would like to keep it that way and concentrate on how to borrow money. That means getting deposits efficiently, how to lend it out.

There was -- with the proper credit and proper margin, and hopefully that will yield the kind of results that our investors commission us to do. Thank you very much. We appreciate your interest.

Ladies gentlemen, that does conclude our conference call for today. We thank you for your interest and you may now disconnect your lines.