Preferred Bank (PFBC) 2014 Q2 法說會逐字稿

Presentation

Good day, and welcome to the Preferred Bank second quarter 2014 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Tony Rossi of Financial Profiles. Please go ahead.

Thank you, operator. Hello, everyone and thank you for joining us to discuss Preferred Bank's financial results for the second quarter ended June 30, 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'll 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 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. Mr. Yu, please go ahead.

Thank you. Good morning, ladies and gentlemen. I'm pleased to report the operating results for the second quarter of 2014. For the quarter, the bank earned $5.9 million in net income, which is $0.43 per fully diluted share. This quarter is a quarter of growth for our bank. Our loan growth 4.9% sequentially or nearly 20% annualized and the growth was proportionally divided between all segments of our loan portfolios.

It is also a pleasant surprise that our deposits has grown 22% for the quarter, especially when most of the growth is coming from non-interest bearing DDAs. While I can offer no specific reason to the size and to the composites of this growth, but I can only say that we gladly accept this good fortune. Most of the loan growth was originated in the second half of June. As such, it contributes very little to the earnings of our second quarter. However, since we're forming the base for a higher level for the third quarter, it should be a more -- having much more effect in the next quarter, especially when our pipelines still remain strong and then the -- still continue accumulating additional loans during the beginning part of July.

For the quarter, we were able to maintain or improve slightly the net interest margin, largely because of the employment of excess cash into security investments, also because of the growth in the non-interest bearing DDAs.

A bigger pleasant surprise to us is for the first time in a long, long time the efficiency ratio has dropped below 40%. Of course, this quarter were aided by a gain on sale of OREO and without that, the efficiency ratio would have been in the low 40s. But we're fully confident that we can maintain the low 40% efficiency ratio for the remainder of the year.

Our bank is currently very well positioned for the interest rate increases. We are nearly -- heavily asset sensitive balance sheet. So it's well positioned for the interest rate changes if it ever comes. However, we're perfectly happy to operate under the current interest rate environment. Again, we're pleased to report the $0.43 earnings per share, which is a 34% increase from a year ago. Thank you very much.

Now, we're ready for your questions.

(Operator Instructions) And we're just going to pause momentarily to allow any questions to enter the queue. And we'll take our first question from Aaron Deer. Please go ahead, sir.

Li, the growth this quarter was quite impressive and in particular, you mentioned the DDA inflows, the non-interest bearing deposit inflows. I guess I was -- your comment about not knowing the size and the components of that, I'm just wondering, are you comfortable with respect to the granularity of what's coming in? Was there anything chunkier and unusual in terms of a single deposit or bringing in a lot of money that would be temporary? Or do you feel like this is sticky deposits that will be around for a while?

So there's a couple of them coming in with a little bigger chunk in the let's say $10 million level, but these people always come in and out between quarters, and not necessarily regularly, but they always there's been a pattern of their business. So other than that, we are -- we have been seeing that growth should be on the, how should I say, more comfortable basis. For instance, for the first 20 days of July, we see the growth continues.

That's great. And then on the loan side, you mentioned that you guys are very well positioned for higher rates and I think a big part of that is your preference towards variable rate loans. Can you talk about what the -- kind of what the mix is today, variable versus fixed, and not just what's on the balance sheet but in terms of where new production is and how you're able to maintain that profile just given that I would expect that customer demand would be for more fixed rate product.

Okay. We have, for the second quarter, we have maybe done one or two relatively small loans in the fixed rate loans, okay and usually for a shorter period of time, okay. So we have conscientiously tried not to do fixed rate loans as we have held them off for a long, long time. Our strategy has always been having more deal flow coming to us and not necessarily commit ourselves to the interest rate risk. We don't want to commit ourselves in.

And I'd like to also report that it seems to me that the customer demands in the later part of the second quarter for fixed rate loans seems to be subsided a little bit. Yes, they are still demanding, but the demand is met by the supplier is not as strongly met by the supplier. In other words, there's less banks willing to do the fixed rate loans, therefore create less of a pressure to us.

Okay. And then on the loan side, of course the growth has been really quite impressive. Can you talk about geographically where that�s coming from, as well as maybe by the type of product. And in particular, I am curious to know if, what kind of traction you�re getting up here in the Bay Area. I know that you had opened a San Francisco branch and seemed pretty optimistic about the prospects here.

Yes, Bay Area that we are, we have been in operation since late February of last year. To this date, Bay Area total deposit level is a little over $80 million outstanding with commitment that's higher than that, okay. We are basically more heavily involved in the CIE area, I mean than the CNI area. But however, the Bay Area deposits, I mean loans has been very granulized. Very few loans of the Bay Area loans over $3 million, $4 million. Most of them are below that, okay. And we actually -- most of the property we finance in the Bay Area is really in the city. And we are very thankful that we have a team of people have been banking, been bankers over there for the past 30 years. So we�ve got a lot of their customers following them.

That�s great. And any plans for new hires that you�re looking to do before coming down to the end of the year?

We would do the strategic hiring, okay, as we always. We have basically step ourselves really well, especially the back office and front office, but we are looking to -- any time we see somebody has a record that we think we can be benefited by, we will make no hesitation in hiring them.

That's great. This has been helpful. I appreciate you taking my questions.

Thank you.

And we�ll take our next question from Timothy Coffey of FIG Partners. Please go ahead.

Li, the new loans that came on in the quarter, especially the back half of June, what were the yields on those relative to the yields at quarter end?

I cannot get you the mixture of the year, because I think it was misleading because the proportion of these -- I mean, CNI and the proportion of CIE sometimes different in our mixture. But I can offer this kind of observation, which I have been keeping on tab about constantly. We are booking the loans in the second quarter generally at the level between $0.05 to $0.10 less yield than the first quarter.

And did I read you right that you don�t expect deposit outflow in 3Q, but certainly the growth rates should slow?

We -- well, hopefully we don�t have outflow in the third quarter compared to the second quarter. In fact, we'd like to grow a little bit because we have had not had any quarter of net outflow for a long period of time, well, certainly, we do not want to break the record. But sometimes, deposits are not that easy to control, but our early indication is that we will be able to hold if not increase in reasonable amount.

Okay, great. And then my last question is, can you provide me with more color on the non-accrual loan held for sale that might pay off in the third quarter?

Okay. Well, we -- I mean our lead back inform us that by the way there is -- I was hoping they have concluded deal by now, but they have a one week delay. So they say they will get it done next Friday. That they reported that they had -- that the borrower has come to them and wants to pay down a substantial portion of that the loan that held for sale, okay. The loan originally has a coupon balance of $13 million plus, okay, and since being amortized, it was slowly below $13 million, okay.

And then the proposal is that they will pay down a big dollar amount, which will result in not only the widening down the balance to a zero, our current held for sale balance, book balance of zero, will also result in the non -- I mean in the recovery for a reasonable amount, okay, reasonably large amount. We don�t know the exact number yet. They�re calculating on that. Now, you can add anything Louie?

Yes. And when Mr. Yu was talking about the $14 million that was our pro rata share of that.

Right. Okay. Great. Well, thank you. Those are all my questions.

(Operator Instructions) We will take our next question from Gary Tenner of DA Davidson. Please go ahead.

Thanks. I just had a question regarding your commercial real estate growth. It�s almost 30% over the last 12 months and I wonder if you could comment on any areas within that line of business that you�re specifically steering away from at this point?

Wellington, do you want to answer that and then I'll add to it a bit later, okay?

Sure, Gary, first of all, we share a [way] clearly from a land loan. We don�t do land loan and also the other of our lending areas in the [empire] is the region that we want to stay away from. We focused on infill and more like an LA, San Francisco, as Mr. Yu mentioned earlier, in the city and stick to what we know best, Orange County as well.

Well, I am sorry, I guess I didn�t mean geographically areas you�re staying away from. I meant any kind of businesses or product type you're steering away from?

No, we basically, as we earlier indicated, those are loans, land development and the less desirable area we stay away from it. The larger land development loan, we just don�t do it, okay. And generally, we�ve been trying to granulize our loan portfolio quite a bit, okay. These days we are generating a number of loans that we are participating out, so in order to granulize it. And we are very fortunate that we have a production staff that was generating more than sufficient loan pipeline for us and not only we can have our growth. We're also participating out quite a bit.

All right. Thank you.

And we�ll take our next question from John Deysher of Pinnacle. Please go ahead.

Nice quarter. Two questions. One on the regulatory front, I think you were having an exam around this time and I was just curious if that�s still on track? Are the examiners still on site and when do you anticipate getting a report back?

We have a large group of examiners on site and they are right in the middle of the examination. And they should conclude their work in a few weeks, okay. So other than that we cannot report anymore there.

When do you anticipate getting the report by?

Well, usually after they have -- I am just speaking from past experiences, usually after their -- I mean their field work, the lead examiner will write up a report and when the another lead examiner from the state agency will also review the report and jointly they have to send their both departments, and one of them we may even have to send to Washington, D.C., okay. So the whole process, sometime, is one month, sometimes two months. So we don't know, okay.

Okay. And do you anticipate opening any new branches between now and year-end? And if so, where?

Yes, we are targeting have a branch opening late this year in the San Fernando Valley location of our greater Los Angeles area.

Okay. So that will open, what, November or December?

We would like to open in November but it looks like it could be December.

Okay. Good. And how are you staffing that? Are you hiring new people or are you transferring from existing branches?

We have a policy that whenever we open up a new branch, we will recruit the bankers and it has been in the area having support from the local community. And in this particular case, we have inventory that had demand since that, since last year. And we have been gradually building up his lieutenants now.

I'm sorry, so you've hired the key person already?

Oh yes, one year ago.

Excellent. Thanks.

And it appears that we have no further questions at this time. I'd like to turn it back over to management for any closing remarks.

Well, thank you very much. We are very pleased with our quarter and as I said, indicated that we look forward to continued performance in the same line in future quarters. And with that, for any additional questions you can certainly call us. Thank you.

And this does conclude your teleconference for today. Thank you for your participation and you may disconnect at any time.