Preferred Bank (PFBC) 2014 Q3 法說會逐字稿

Good day, everyone, and welcome to Preferred Bank's third-quarter 2014 earnings conference call. (Operator Instructions). Please note, this event is being recorded.

I would now like to turn the conference over to Ms. Kristen Papke with Financial Profiles, Investor Relations for Preferred Bank. Please go ahead.

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

Good day, ladies and gentlemen. I am happy to report our third-quarter operating results. This is a quarter of good news.

First of all, in July, we were fortunate enough to have a $4.6 million loan loss recovery. Then in mid-September, we received official notice from our regulators that they have terminated the MOU that we entered into, which led to the later [important] announcement of resumption of payment of dividends in October.

Now we are reporting to you one of our best quarter ever. For the quarter, we earned $0.46 in diluted earning per share. This is even with a higher-than-expected tax provisions.

On the business side, this was one of our best quarter of growth. Loan growth $82 million or 5.7% in linked-quarter basis. Deposit growth $71 million or 4.3% on the linked-quarter basis.

On the loan side, our pipeline is looking strong at this point of time. And fourth quarter, as we all know, is a quarter of holidays. So the growth in fourth quarter is pretty hard to predict, as the holiday may produce different kinds of results than we anticipated.

But our San Francisco office, after one and half years of operation, has been performing well. Total loan has reached $90 million by September 30. Our Orange County office, which we started out the loan operation there in about a year ago, has now become a $60 million loan office. As we -- [probably] as we expected.

Both market looks pretty open to us and we are continually looking for new opportunities and new personnels to further penetrate these markets. In December this year, we'll be opening up our new San Fernando offices -- office. Most of the major hiring and staffing has already been completed for that office.

On the deposit side, I would like to first apologize for my mistake of putting in the press release that the gross in the third quarter is most of them is from core accounts. Actually, all of them are from core accounts.

And we cannot identify any specific reason for this strong growth in DDA there in May, but we just feel very fortunate about that. Must be the hard work of the entire personnel of the Bank.

Looking forward, we will be stepping up our effort in the Chinese market to capture the wave of new businesses and immigrants from China.

Our nonperforming assets continue to decline. On September 30, it now stands at approximately 0.5% of total assets. This last large piece of our nonperforming loans, which amounted to approximately $8 million, which finally cleared a long, long process, a bankruptcy process in October and became an IEO.

This is a mixed-use property of retail and office building located in an affluent community otherwise known as the Chinese Beverly Hills.

The property was neglected, mismanaged, and we are currently bringing it up in shape a little bit. Hopefully we can dispose it at a good price within the near future. By that time, a total NPA of the Bank will be negligible.

I'm just pleased to report all of these events to you and hopefully that we can continue the trend of the growth and profitability as we have had for the last 10 quarters.

Thank you very much and I am ready for your questions.

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

Good morning. I have a few questions. I will start in reverse from your discussion. Li, on this nonperformer that went through the bankruptcy process in October, as that transitioned from NPAs into OREO, was there any sort of mark on that, one direction or the other?

It is already fully marked at the appraised value. It just completed about a few days ago. Louie, you want to add some color to that?

Yes, Aaron, I want to make it clear on Mr. Yu's comments. The Bankruptcy Court has approved us foreclosing. We have actually not foreclosed yet. But there is a trustee's date scheduled in October.

And we carry all of our nonperforming at fair value less cost of sale. So whether it is an OREO or a nonperforming loan, it would already be marked at that value.

Okay. So you wouldn't expect any sort of change in that at this point?

Unless there is an updated appraisal, we would not.

No. The appraisal -- updated appraisal will be six months in all. We have -- we will be carrying it over minus the sales cost on the appraisal value and plus minus the contingencies, as we always do.

Right.

I am not clear that is about to be moved to OIU.

Okay. And then, Li, notwithstanding your comments, but -- and I recognize that the -- you can oftentimes see a slowdown in activities when you head into year-end, but you did sound like you are positive on the pipeline. Can you talk about where the pipeline stands today versus three months ago?

The pipeline today in total dollar amount, if you want to look at the dollar amount, it is always in different stages of a development. And broad dollar amount is a little bit higher than as of September 30.

I mean, as of September the earliest is then June 30, okay. So Wellington, you want to add some color to that?

Well, we always try to plan ahead on our production. So we do have [six to eight] people, altogether about 60 people in our frontline production team. So I think that what Mr. Yu mentioned, it is robust, it is very healthy. So we just have to focus and execute.

Okay, thanks, Wellington. And the -- I guess, lastly, Ed, if you can talk a little bit about the liquidity build that we had this quarter. I am curious because it seems to have weighed on the margin some.

Can you talk a little bit about what type of level you like to see cash balances as well as investment securities? What kind of desired mix and level is for those?

I will let Ed correct me what I have to say. He always does that, anyway. Anyway, the weight on the margin, actually, you know, the actually deposit growth is less than the loan gross.

But weight on the margin is that because for the quarter, average, average deposit is $150 million more than last quarter. And average loan is only $60, $70 million more than last quarter.

So with that, it puts the weight on the margin along with the production side of the loan that we have 75% of the loan increases in C&I loan, which carries a littler less of a coupon rate than the CIE loans.

So basically that is the thing that brings the margin a little bit, as last quarter, we had a surprising increase in margin compared to the first quarter. So it is sort of like these kind of loan come in and we cannot really determine which -- how much amount of C&I will book every quarter. So we have to [may play] some natural effect.

Now, Ed, you want to say anything about your liquidity declining?

Well, I am not going to contradict you. In terms of where we want to be from a liquidity standpoint, Aaron, and from an investment security standpoint, I think was a question, certainly less than we have now on the balance sheet. And obviously, we will try to work through that as loan growth continues.

I don't think we would expect deposit growth to continue perhaps on the same page that it was in Q3, although that remains to be seen, especially with the recent move down in interest rates on the treasury curve.

But certainly, we would like to have cash well under 10% of total assets and probably removing the bulk of that back into the investment portfolio and still keeping the loan to deposit ratio at a pretty constant where it is right now.

Okay. And you guys haven't started -- I know you have been averse to go back and the state time deposits again, but you haven't had need to go back to that at this point, right?

No, certainly not a need, but it is certainly from a long-term planning standpoint, certainly something we are pursuing.

Sure. Okay. All right, that is it for me. Thank you very much.

Gary Tenner, DA Davidson.

Good morning. Couple questions -- first on the bonus accruals that drove up the personnel line this quarter. Do you think that -- was there any true-up in there that went back to previous quarters or should the fourth quarter run rate represent what the third quarter was?

Okay, Ed, you want to answer that?

Sure. Gary, in terms of the run rate on the bonus accrual, it is probably going to be very similar -- Q4 will be probably pretty similar to Q3 in terms of where we are going to go. Q2 was a little bit of a true-up, but we would expect it to be pretty similar. And as a matter of fact, the overall salary and benefit run rate to be pretty similar in Q4.

Okay. Thank you. Then just a follow-up on the NPA. So of the total NPAs as of September 30, which we are pretty close to $11 million, I think, what was the size of that OREO that you got --

It is about $80 million. It is about $80 million.

$3 million?

8.

$8 million. Okay. That is what I thought you said earlier, I just wanted to confirm it.

Yes.

And do you have any sense, given the property, what a reasonable timeline might be once you take possession of it to dispose of it?

No. We certainly we try to see whether we can get a good price out of that. I think I am greedy -- if I can make a profit on that, we would do that. Especially with this thing, we'll be carrying some income anyway. It is not non-earning assets, even though it is REO. Okay.

Okay. Thank you.

Don Worthington, Raymond James.

Good morning, everyone. In terms of the loan activity in the quarter, were there any whole loan purchases or any participations in the third quarter?

Yes, we participated in a few loans in the third quarter. We purchased participation. But the most of our purchases really are cuts -- that we do cut deals with three other, four other bank together in local lines. We decided to join forces to spread out the risk, which several of the large loans we are as close as customer is so-called the lead bank, okay.

So -- but, however, we have, as we earlier indicated, we have started the entertainment department. Most of the loan from that department is because the size of that is resulting from participation from other major banks, such as some of the largest banks in our -- on the earth now.

Okay, thanks. And then in terms of -- you have just gone through the effort to shore up ESA compliance. Do you have a number that in terms of maybe the increase to your cost base that that resulted from that effort?

Cost increases are already are in the expenses' increase. I think we are fully staffed and well staffed right now. And if you notice that in the last one year, we have done a lot of catch-up work. I think our staff is sufficient for to handle the growth.

Other than some minor adding, because we recently had a -- was going to replace one of the compliance officer who left us. But it is just one replacing the other.

Yes, Don, on that, the majority of the cost this year that were what we would consider to be more or less one time or nonrecurring were for consulting fees. The staffing that we did, the staffing increase we did in that area was all primarily done in 2013.

So what you see in 2014 is pretty much all-in. And again, we had additional consulting costs in 2014, but those have now abated, as you can see, in other professional services, that cost going down.

Okay, great. Thank you.

Tim Coffey, FIG Partners.

Thank you. Morning, gentlemen. I was wondering if I could get some color on the construction loan growth in the quarter. How much of those was organic versus participations and were there a lot of those loans or just a few big ones?

Majority of our construction loans is really originations. Loan originations, okay. There are one or two loans we are doing at the request of very friendly partners in our banking community that we help each other out just by also reducing the -- to make it more granular for every one of us. Wellington, you want to add some more on that?

Yes. Our average -- I think they are under construction. Yes, we are all self-originated, as Mr. Yu mentioned. But no, there's also quite a bit of reciprocation. Like we have a common customer that we originate a loan, we sell off a piece to other bank, and likewise the other way around. So it is pretty much self-originated over our good relationship customer.

Louie, you had any average number for the size of construction loans?

Generally, around $5 million range. But again, these are all -- and as Wellington and Mr. Yu have pointed out, these are mutual customers. Generally when we do --

No. I mean the total average, about all of the construction loans that we are --

No, it is about $5 million.

We originate in this quarter. I thought we had a lot of $1 million, $2 million construction loans we originated.

We have originated quite a few of $1 million and $2 million and some in the $8 million to $10 million. On average, it is about $5 million.

All right. Okay.

Okay, yes, that is great. And would you expect the same type of growth going forward or is it on quarter-by-quarter basis?

In construction loans? No, we -- this is -- In construction, this is one of the heavily managed area in the Bank. As you know, the regulators is still at this point of time and put a heavy, heavy, how should I say, eyeglasses on to -- on the construction loan.

So they have -- FDIC has guideline houses -- they like to see the Bank's construction not to exceed 10% of the risk-based capital. Or whatever total capital is. Capital plus reserve.

So we -- not only are we projecting, we are -- our numbers are lower than that. Not only are we projecting construction loan out, we have to projecting one year out out to see what the outstanding is. We will be managing that was in the level.

Okay. Okay. Then, Mr. Yu you have any kind of targeted dividend payment ratio?

We -- historically, I can only quote you historically that we have been paying between 20% to 30% of our -- in payment dividends. And of course, our first dividend was paying based on whatever we earned in the last quarter. The limit exceed 20%.

So we like to think that will be in the foreseeable future, that will be the guideline we are going through. And obviously by the end of this year, or by first quarter next year, we will be reviewing the dividend rate again.

Okay. Will that kind of forward payment ratio also include a normalized provision expense? The provision could be low for a couple more quarters here?

Well, we look at the provision as we continuous looking at a situation right now as far as looking at situation right now as far as looking at a number of factors. Including from the ever-improving assets quality. And we decide, then we decide on how much we want to reduce and from our excess reserve that we have.

And now from the situation, we have to consider the FASB is a new method of current estimated. I mean a loss model, whatever that number model is they have. So with that, we are keeping a close eye on that. But within the foreseeable future, we can see we are probably doing the -- based on the current level in the provision now.

Okay, all right. Thank you, that was all my questions.

(Operator Instructions) John Deysher, Pinnacle.

Good morning, everyone. Couple of questions. When does the San Fernando Valley office open and specifically what town will that be in?

December, in the town Tarzana.

It is in Tarzana, okay. Fine.

That is on Ventura Boulevard.

Okay, fine. Secondly, did I hear you correctly in that there has been an entertainment department that was started up? I am not clear exactly what you are referring to there.

We started the entertainment loan department last year.

Fine. I am not familiar with that. What is that, specifically?

Well, that is basically movie and TV studios, major companies. Such as the largest being Fox, DreamWorks, MGM, all of these big names and Millennium, Legendary. These kind of -- all these names.

And what type of assets specifically are you lending against there?

Lending basically against -- majority of we are lending against their library.

Their film library?

Yes.

And what type of loan to value?

It ranges. Between -- some of them as low as 20%.

20% loan to value?

Some of them as low as 20%.

I'm sorry, maybe I am not being clear. What would you say is the average loan-to-value for that group of loans?

Between 30%, 35%.

Okay. And what is the total loans right now?

You have entertainment department total loans?

I think it is around $30 million at this point.

Okay. So it is still fairly small. All right, good. The other question is we are reading in the press about nontraditional lenders who are coming into the smaller property market, loans of $5 million to $10 million non-bank type lenders. Perhaps you have seen some of these as well. Are you seeing any pressure in terms of rates from these new entrants?

Number one, that people always report on things later than actually happens. They have been there a long time. We have been facing competition for a long time. But no, rates -- usually these nontraditional bank managers lend at a higher rate. That is not our competition in terms of the things. In term of loans.

Okay. So you are not seeing any pressure at all from new lenders, new nontraditional lenders in your markets?

Not like the old days, when you have GECC and GMAC and these kind of a nature that are coming in the big, big estate loans at real low rates.

Yes. No, these players are much smaller and I think much more than both of those bigger players, but --.

We are not being affected by them.

Okay. Good. And finally on the construction loan total, I think it is, what, $125 million or so? How fast do you think that is going to grow over the next couple of years or so?

We estimate. I know we keep our tab in term -- [in a place of one year] -- do you want to quote exactly the dollar amount, because the rough estimates.

Right. John, as Mr. Yu pointed out, this is something that we monitor and evaluate very closely. And aside from the regulatory guidelines, our Board and our senior management team has a very close eye on this.

We would hate to speculate, because we are constantly having payoffs and draw requests. At this point, we are well within the regulatory limits and our internal guidance limits. I think what we have seen and is -- I don't think we should see a big change from what we have seen in the past as far as fundings.

Well, John, all I can tell you is that I will not quote you the exact amount. And I am not able to and I don't want to. And the thing is that all we say is that we will definitely keep ourselves way below the regulatory limits.

Okay. It is just it has doubled in the last year or so and I guess that raises some red flags with us.

Well, you are not in the -- if you are in the Hampton, which you are, you should see the activity over there. You should see how much bank to bill business over there. And we aren't not going only chase the business, which pays low returns and no [cavities].

Right. All right, well, good luck to you.

And ladies and gentlemen, that will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Yu for his closing remarks.

Well, thank you very much for the -- for your attention. Our Bank, as you know, that we had a pretty good quarter and I would think we were in certain future in the next quarter, we hope our activity or our performance will be up about the same level.

And for all these years, we thank you for your interest and support. And as I said, any additional questions you may have, you can call Ed Czajka on the phone. Thank you.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.