Preferred Bank (PFBC) 2016 Q1 法說會逐字稿

Good day, and welcome to the Preferred Bank first quarter 2016 conference call. All participants will be in listen-only mode.

(Operator Instructions)

After today's presentation, there will be an opportunity to ask questions.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference call over to Ms. Kristen Papke, Investor Relations. Ms. Papke, the floor is yours, ma'am.

Thank you. Hello everyone, and thank you for joining us today to discuss Preferred Bank's financial results for the first quarter ended March 31, 2016. With me today from management are Chairman and CEO, Li Yu; President and Chief Operating Officer, Wellington Chen; Chief Financial Officer, Edward Czajka; and Chief Credit Officer, Nick Pye. 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 would like to turn the call over to Mr. Li Yu. Please go ahead.

Good morning. Thank you for attending the conference.

I'm happy to report that Preferred Bank's first quarter -- that net income was $7.8 million, or $0.56 a share. This quarter included some one-time nonrecurring items. Otherwise, the net income would have been a bit higher.

The highlight of this quarter is really the gross of the bank. For the quarter, loan has grown 4.4% from year end, and the deposits have grown 3.1% from year end. The higher than expected loan gross is largely because of the subsiding pressure in our loan being refinanced by others. This has been reported to you in the last earnings conference, about the subsiding pressure. This also caused our net interest margin to be stable or slightly improving in actual cents.

At this time, looking ahead, our second quarter loan pipeline and loan production looks quite strong. We feel it will be at least equal to the first quarter, if not exceeding that. The Bank currently is continuing investing for the future. In the early part of the year, we have added a number of professionals in the areas of [compliances] and BSA. Beginning February and mid-April, we have added a number of experienced production personnel. In fact, a total of six new experienced relationship officers have joined the bank between late February and mid-April. We feel this is very important for our continued growth.

Now I'm ready for all your questions.

Thank you, sir. We will now begin the question-and-answer session.

(Operator Instructions)

We have a question that comes from Aaron Deer of Sandler O'Neill and Partners. Please go ahead.

Good morning, guys.

Hey, Aaron.

The growth was pretty extraordinary this quarter and it sounds like it's going to continue to be so. I guess, given the strength this quarter, did you use loan purchases at all to augment that growth, or just to better diversify where some of it was coming from?

No, we did not purchase any loans this quarter. Everything is in the natural course, okay.

In fact, this quarter's activity is stronger than expected, as I indicated. We were planning a certain kind of level with the payoffs, but didn't happen. The new production is slightly higher, not that much, but slightly higher than our previous quarters.

That's perfect.

And then, I guess, looking at the mix where it's coming on, you've had a decent amount of diversification in there, but obviously you have a good deal of commercial real estate. I was wondering if you would kind of give us your thoughts on where you stand relative to the regulatory thresholds and how you're managing the regular expectations for being able to maintain the higher level.

Okay.

Actually, if you recall that we concluded acquisition on November 20 of last year. With that added up [amount] to close to $100 million of [CREs] into our box. Wasn't for that, our total CRE would be just slightly over 300%, okay.

As this CRE things -- we conscientiously try to manage that, but the management only happens after it's incurred; in other words, it's a staircase type of a way. When it grows, then we look at it, see what we can do to mitigate it, so we'll continue to monitor that to meet the regulatory guideline.

But, speaking of the guideline, we had, in our industry, and all our fellow bankers and numerous conversations with the regulators, almost all kind of gathering together this question was asked. And we have answers as high as from very senior office of the regulators indicating it is a guideline. It is a government reminder of that.

If you exceed that, you should intensify the procedure of your monitoring and your loan process. And by no means government is trying to regulate us not to exceed that particular limitation.

As you -- our urban banks that -- all are saddled with a lot of CREs. And we, like our -- many our fellow bankers, is always conscientious about that, try to live up to the regulatory expectations. Now, having said all that, we'll continue trying to monitor that, and we have other things we're looking at, to try to reduce our CRE concentration.

Okay.

And then, on the deposit side, there was a, I guess a decline in the noninterest bearing funds. I'm just wondering if that was just kind of normal seasonal outflows with, you know, business needs changing during the year, or if there was anything else behind that.

Well [movement in our gross packs in] some kind of seasonality that's not easy to detect. For one thing, the first quarter is always a quarter that we found a lot of businesses has to pay income taxes, and naturally the first thing that they draw their money from is the DDA accounts, okay.

So, that things should be mostly the outflow of the DDAs is because of -- and we try to understand a bit more, but some of the -- mostly the biggest reason really for paying the taxes.

Sure.

And then just maybe one more and then I'll step back. The reserve coverage ratio has been drifting lower. Obviously, your credit's been superb and so there's no good reason for it to go in the other direction, but just curious, as it drifts down here, at what point might we get to a floor on that?

Well, we, first of all, the 1.1 reserve ratio is really the result of, number one, the acquisition we did, the $150 million in loans that was marked, okay, to present value. So there's -- carries no loan reserve on that, although the loan was discounted, okay. And then this bank always has some large number of cash secured loans -- is equal to about that in this quarter, and it was about $67 million in cash secured loan.

If we add it together, the reserve would have been 10% higher, the factor all in the 1.2 ranges after considering these two factors. But yes, reserve, as it's gone down, we -- as you can see that in reality we're provided $1 million provision in the first quarter and likely with the future close (inaudible) -- our new provision will be about to represent the full [gross] of our loans.

Okay. Terrific. Thanks for taking my question, really appreciate it.

Thank you.

(Operator Instructions)

And we have a follow-up question from Aaron Deer of Sandler O'Neill and Partners.

A busy day for earnings season, obviously. I'll just lob in one or two more questions.

With respect to the UIB acquisition, any remaining cost saves that we might anticipate from that?

Well, Ed, do you want to take that up?

Not, not really, Aaron. There could be down the road, but those are somewhat contingent on some other things happening. But by and large, the cost saves are more or less realized in the first quarter.

We did incur a little bit of expense during the first quarter, but not really meaningful.

Okay. And then, on the OREO, do you have any expected time line for a sale on that?

Nick, you want to take over that?

Yes, Aaron, for the only one OREO on our book, we will closely monitor the development. We are working with that [amortization], and try to see what's the best solution we [could get rid of this] deal.

But still, I believe it will take a little bit longer, maybe six months to a year to find our [true] solution.

Okay, to bring you update on that, I guess we previously reported to you, this thing is under litigation. We [see we] have unresolved litigations that related to the previous owner [of] the bank was dragged into it as we now are the proud property owner.

So the lawsuits probably will be settled or be determined within the next three months, okay. So from that point on our marketing effort will start.

Got you. Okay. Great. Thanks, guys. I appreciate you helping me out.

At this time, we have no further questions. We'll go ahead and conclude the question-answer session. I would now like to turn the conference back over to the management team for any closing remarks. Gentlemen?

Thank you so much for attending our meeting today. And we are still very conscientious in improving all aspects of the bank operation, and we feel strongly that 2016 could be a very good year for us. Thank you very much.

And we thank you, sir, and to the rest of the management team also for your time today. The conference call is now concluded. At this time, you may disconnect your line. Thank you, take care, and have a great day, everyone.