Preferred Bank (PFBC) 2015 Q1 法說會逐字稿

Good day, and welcome to the Preferred Bank Q1 2015 earnings conference call.

(Operator Instructions)

Please note, this event is being recorded.

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

Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the first quarter ended March 31, 2015.

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, Louis Couto. Management will provide a brief summary of the results, and then we will open 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. Please go ahead.

It appears the Management team's line inadvertently disconnected. Just one moment, while we get them reconnected to the call. Thank you.

Thank you. I just finished talking about -- am I clear to everyone? I just finished talking about that there has been a lot of [loan free ops] in the first quarter because many of the loans jumping to CMBS market for obvious long-term fixed rate loans.

However, our first quarter production was strong, and we resulted in good growth in the first quarter. Looking ahead, our second quarter pipeline looked good. However, likely most of the new loans will be originated in the second half of the quarter, which will result in approximately the same pattern as first quarter with a lower average loan growth for the quarter.

On the deposit side, first quarter was the $80 million gross, or 4.5% on a linked quarter basis. All the growth from DDAs with three quarters of them in the non-interest bearing category. We are very pleased with this result, but also realize that this may not be a norm for the long term. In fact, we're also contemplating whether to add on some TCDs in the eve of interest rate movement, so seeking somewhat interest rate stability for one or two years period.

During the quarter, assets quality on a non-performing loan category, our non-performing assets category did not change much, remained at approximately $16 million. However, there was a continued improvement in the classified assets category. Total classified assets, which including the non-performing assets, is now stand less than $20 million, less than 8% of the capital reserve of the Bank.

With that, we are seeing a gradually reducing legal expenses. We hope the moderation will be more evident in the coming quarters. First quarter expense also included some seasonal expenses, such as payroll taxes on bonus and reflecting the full quarter of the expenses on new branch of San Fernando Valley, which they have started operation in February.

And with that, the efficiency ratio stays 42%. We're pleased about that. There may be some unintended consequences about rewarding our employees with RSAs, and with now the income allocated related to the RSA seems to be bigger than we anticipated, now takes away a penny of the EPS. Otherwise, our operating income would have been $0.49 on a fully diluted basis, rather than $0.48.

Probably to me the most important thing is that the Bank now maintains a -- still maintains a 89% rate sensitive, asset sensitive loan portfolio. In other words, 89% of the loans are on a floating rate basis. We are ready to take full advantage of the rate, the increases, if it ever happens.

Thank you very much. Now we're ready for your questions.

(Operator Instructions)

Our first question comes from George Connaughton with DLV Capital.

Good morning, guys.

Good morning.

My question first is about the high levels of capital at the Bank. There was some mention in the 10-K regarding uses of that capital. You guys have reinstated the dividend, and you opened a new branch.

But you mentioned that you were looking for some other uses to deploy that capital as well. Does that include -- is it just de novo openings, or might that also include acquisitions as part of the strategy?

It would be on our mission to continue to look for possibility of that.

For acquisitions?

Yes.

Okay. And just to help me get a picture of I guess your strategy, the long-term strategy for growth and fit with the Bank, can you give an example? I'm not looking for names of course, but just characteristics that you could find attractive, like what characteristics of a Bank would be a good fit for Preferred or maybe what characteristics would you see as not a good fit, when looking for acquisitions?

We actually there's two type of banks that we would be interested in.

First type is that represents significant cost savings immediately, which means that basically in the same area we operate in, and especially a little bit weaker in the area. So that would give us enhancement into our current operation, also in the meantime would show some combination expense savings, and which this is the category we would be interested in.

Other is representing the new market. For instance, we opened a San Francisco office. Before we that, we have looked into the possibility of acquisition, but we decided to open an office first and has been a very successful operation there.

Obviously, by saying that, we can continue to look for the opportunity there to enhance, to make larger, even more efficient.

Okay. All right. Well, thank you.

As far as leverage rate, basically as far as looking for banks that are loaned up versus not loaned up, or other characteristics that way inherent to the Bank, anything there, other than market area, in other words?

Could you repeat the question again. I didn't quite get it.

Sure, I'm sorry. As far as other characteristics, looking at banks, not just market area but basically their leverage for example, the amount of loans per assets, certain types of deposit characteristics, anything like that that you find attractive or unattractive?

Actually, right now that obviously deposits always attractive, rightly priced deposits is really the most attractive things for the long term. But we kind of believing that wherever we go, we have the capability of recruiting adequate loan staff to add on to the loan to the operation, I mean through the operation.

So we're not really looking for something loaned up or not loaned up. Also, the opportunity that will present to us.

All right. Just one follow-up question, I guess.

With respect to related loans as well, and I guess new loan teams. You mentioned I think before that you've started an entertainment loan division, and can you just comment on that as far as how -- well that industry first of all, what exposure that currently represents in the loan portfolio? And also any other industries that represent a sizable exposure to the loan portfolio?

Okay. Entertainment loan portfolio, I will let Wellington answer that regarding to the nature of that.

We at the Board level look at it as really a diversification. If I diversify one of the C&I loan products, realizing entertainment company is one of the hardest things on the market nowadays. Not by coincidence, after we get into the field.

All you see is news of all the Chinese big companies come in, partnering with Hollywood studios. But we also believe the contents going to the future will be a big business.

Having said that, we also recognize our limitations. That we are basically still sort of participating with the larger, very, very, very, very -- I mean, experienced major, major, major banks to get part of their loan portfolio, and on the companies that we're familiar with on basically that Company that represents a steady operation.

Wellington, you want to say what's the portfolio number, right now?

The portfolio right now is about $30 million, and these loans are more or less corporate loans. They're asset based, lending against library. You mentioned, we joined with a big bank to take a piece of action here and there.

Okay. And so other than entertainment, any other industries represent a sizable portion of loan origination, or just in the portfolio in general?

We do not have major concentration. We do have a plate of concentration, limitation the Board approves every year based upon economic movement of various categories. In fact, one of the major things that are regulated with concern is concentration.

Okay. Thank you.

(Operator Instructions)

Our next question comes from Aaron Deer with Sandler O'Neill.

Hey, guys, it's actually Andrew Liesch on for him. How are you?

Great.

Hi, Andrew.

Question on the loan production. Just curious if you could break out the yields that were added by type? What are new CREs loans being added and what are new C&I loans being added at?

Right at my fingertips, okay. The CRE loans we are newly underwritten or newly booked, put it this way, originated in the first quarter, the net yield is [5.0251] weighted average.

Got you. And then on the C&I?

C&I on the new loans, let me see. [3373].

Got you. Thank you. And then you mentioned that you may be looking to do a CD promotion just to lock in some longer term funding. Just kind of curious what sort of rates you're looking at? What are you currently offering, and what's the -- (multiple speakers).

We don't intend to do promotion immediately.

Okay.

We have seen CDs going out. We probably will defend a little bit.

Currently the market price -- marketplace is full of TCDs priced at [115] and higher for one of these TCDs. We just believe that cost is too high for us.

Got you.

So we will be strategically adding certain things in different categories, and hopefully that will be less than 1% level.

Got you. Okay. And then just with the loan growth again coming on here in the second quarter, maybe towards the end, just seems like with the liquidity that you do have that maybe the margin might hold in this level or maybe be down a little bit in the second quarter. Am I looking at that correctly?

Aaron, this is probably the science that can never answer that, because there's so many factors affecting that, when to of move, what's the loan payoff, the rate, average payoff was as compared to -- which is something that we really don't have control. And the new loan booked sometimes we have the dollar amount, the rate finally has not been fully negotiated.

It may result in $0.25 change based either way. So I would generally venture to say that we will not see too much difference compared to the first quarter in term of net interest margin, but you must give me the flexibility to say that I'm not 100% sure about that.

Right. Of course. All right. Thank you. I'll step back.

(Operator Instructions)

We have a follow-up again from Aaron Deer with Sandler O'Neill.

Hey, guys, Andrew again. Sorry, if it's just me, one last question. What are you projecting for the tax rate going forward?

Tax rate going forward, Andrew, will probably be right where it was at for the first quarter, or probably slightly higher as we move forward. As earnings grow, our component of tax exempt earnings becomes smaller as an overall percentage, so we'll see that ETR tick up a little bit towards 40%.

Thanks very much.

At this time I'm showing no further questions, so I'd like to turn the conference back over to management for any closing remarks.

Thank you very much. Represents the least questions, we've had in all the conferences we had. We must represent that our financial statement's so transparent.

In any event, if you think about anything, you can always give us a phone call. Okay. Thank you very much.

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