Preferred Bank (PFBC) 2016 Q2 法說會逐字稿

Good afternoon and welcome to the second-quarter 2016 earnings conference call.

(Operator Instructions)

Please note this event is being recorded. I would now like to turn the conference over to Kristen Papke, Financial Profiles. Please go ahead.

Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the second quarter ended June 30, 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 Pi. 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 meanings 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 risks -- 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, or good afternoon. I am very pleased to report our second-quarter results, as there are many positive events in this quarter. First of all, the bank raised $72 million capital in the form of subordinated debt. Although we have ample primary capital, but our risk tier 2 capital began to show a limit -- a lesser amount than the level we would like to have.

More importantly, our CIE concentration ratio has entered into the area that we begin to feel less comfortable. Those are the primary reasons for raising this fund. We have deployed $34 million of this fund on July 1, to purchase a home mortgage portfolio and we most probably will purchase another home loan portfolio to fully utilize this fund. After that, the net interest in effect to the fund to this setback is probably in approximately about $250,000 a quarter. With this new capital, it does allow Preferred Bank to continue to grow at a respectable rate.

For the second quarter, our total loan increased $114 million, or 21% plus on an annualized basis. The $121 million may be a -- $114 million may be a record for the bank. Early indication in the third quarter, which is up to now, the pipeline seems to be quite similar to the pipeline of second quarter. We are very pleased with the second-quarter loan result.

Our deposits in the second quarter have increased $157 million, or annualized at 27% or 28%. The $157 million is a bank record. We tried to find out the reason why for this pleasant surprise other than perhaps our effort. Other than that, it is perhaps the reason that we began to be recognized by more customers. Really every rating agency in the country has put us in the top echelon group and most recently, a core rating has rated our deposit to be A minus.

In the early part of third quarter, our deposits continue to grow. As of yesterday evening, we were just a tad below total assets of $3 billion. Especially when considering the interest effect on the sub-debt, we had a slight improvement. Together with a larger average outstanding loan balances, we produced a larger net interest income increases, which in turn has brought our efficiency ratio down to 39.4%.

Despite a very large loan-loss provision, when considering that we have a large recovery in the quarter also, despite a very large provision, we earned $0.61 per quarter, which is a great improvement from the prior quarter. The large loan-loss provision stemmed from a SNiC loan being downgraded to non-accrual status and we have immediately charged off 50% of the loan amount in accordance with recommended accounting practice.

We are pleased with the second-quarter result. The staff and myself are also feeling pretty good for the remainder of the year. Thank you very much. I am ready for your questions.

(Operator Instructions)

Bob Ramsey, FBR.

Hi, guys. This is actually Kyle Peterson speaking for Bob today. Just a couple of questions here. First, on the purchased mortgage portfolios, I was wondering, could you guys give anymore background on that, kind of with regards to things like structure, yields, geography, really just any additional detail you guys can provide would be great.

Okay. That's a July event, but Wellington, would want to answer that?

Sure. We are looking at a geography of California local. We purchased about $30 million worth and we go through the due diligence and we review each individual mortgage in detail, giving the update -- are taking a look at the value and return and the location and everything. The duration really is adjustable, [5.1, 7.1 and 10.1].

Okay, great. That's helpful. Thank you.

Then I guess a little bit switching gears here a little bit. I noticed you guys had good trends on fee income side with both the trade finance and on the OpEx side as well. Are those kind of results for fee income and expenses? Are those good run rates to use going forward? Where there any kind of one-off items in there that we should be aware of?

I will have Ed answer that.

Hi, Kyle. In terms of fee income, yes, it was a very solid quarter from that standpoint and certainly the trade finance line item is really more still focused on standby LCP income is really what is driving that line item. It was a little bit outsized in the quarter so I would say the run rate is probably a little high this quarter going forward, but in terms of non-interest expense, I think we feel pretty good about overall noninterest expenses.

Obviously, we had some OREO cost in there which going forward in future quarters will begin to abate and eventually be gone. Obviously, in salaries and benefits expense continues to rise as we continue to grow in accordance with that. I think on the whole, the non-interest expense run rate should be fairly indicative going forward with some growth built in.

Okay. Great. Thank you. I guess just one last quick one, then I will hop out. If any more information you guys could give on that SNiC credit? I just want to make sure I heard it right. Did you guys say 50% of it was charged off this quarter?

Correct.

All right. Thank you. Any other background you guys might be able to provide about the borrower? Anything else about the state of the credit now would be helpful.

We probably cannot mention the borrower into much detail because lender's liability and other things. We can give you some color about that and Nick will answer that.

Hi, Kyle. For this customer, they are actually a film-related company with DVD [acquisition] business. Right after we recognized some of the trouble with this loan, then I did go back to review the credit file because at the time of approval, I was not Chief Credit Officer at that time. I went back to review the file and I didn't find out any kind of wrongdoing about underwriting and didn't find out any division from our standard policies.

I don't think this is a kind of a loan where we exposed to any kind of risk to other loans that it would have on our portfolio. This is purely an isolated case we believe at this time. Since lenders councils involved with some sort of credibility issues on the borrower side, so I'm not in position to release too much of detailed information on this credit.

That is very helpful. Thank you very much. I think that is all for me. Thank you.

Aaron Deer, Sandler O'Neill.

Good morning, everyone.

Hi, Aaron.

Just following up on that, I understand you can't talk too much about the borrower, but if you could just give the total loan size. It sounds like your piece of this is around $4 million. I was just curious what the total size of the credit was, what industry the borrower --

$5.2 million.

$5.2 million. Okay. What is the total size of the credit and what industry?

I think it is a total size of about $70 million. The industry is entertainment industry.

Okay. Ed, you were touching on expense outlook. It does not sound like you are anticipating too much increase in expenses, although you did highlight in the press release some of the costs related to just compliance and such. Can you give some more color on this? Since you highlighted that, I am just wondering if there are other specific costs that you have in mind that you anticipate incurring over the next couple of quarters?

Well, one thing I learned in business, when you grow or a company gets bigger, you need more people. I guess one of the natural growth was the people. Number two is that whenever a typical banker comes up, we have to do the [opportunistic hiring]. Sometimes when it happens, it happens.

Giving that in total is that there will be some degree of personnel cost increases and I like to think we are going to make more money in the remainder of years. Therefore, we have a bonus formula related to the earnings so the personnel costs, really the bonus side, will also increase. The exact amount cannot be estimated right now because it is [speculative](inaudible) when it happens.

There will be some increases going forward. We like to think that the increase will be in line with the earnings increases, okay? For that matter, okay? For that matter I would say that the efficiency ratio going forward will not change to 45% or 50%.

Okay. Thank you, Li. Another question with respect to the sub-debt offering. Can you maybe give a -- where, I guess using June 30 numbers, where your commercial real estate is as a percentage of total risk-based capital? I don't know if you can do that pro forma for the last kind of stub of the sub-debt that was added.

Pro forma real estate (inaudible) non-owner occupied real estate concentration ratio is right below 300%. Probably 295%, but we have not finalized any final calculations yet. Right below 300% for the quarter end. (Multiple speakers)

Very good. Thanks for the help.

Thank you.

Gary Tenner, DA Davidson.

Thanks. Good morning. A couple of questions. On that mortgage portfolio purchase of $30 million, what was the yield on that portfolio?

About high [4s].

(Multiple speakers) High 4. Okay. I don't know if I heard Li 's comments accurately. Were you saying that presuming and other similarly sized purchase, the quarterly headwind would be about $250,000 from the sub-debt?

Well, with another purchase of the -- was a home mortgage portfolio. The interest, the net interest differences of the debt and the income from the mortgage portfolio will be roughly $250,000 per quarter. It depends on what the rate we get in the next quarter. It could be a little bit less than $250,000; it could be a little bit more than $250,000.

So that $250,000 assumes another similarly sized portfolio though, is that right?

Yes.

Okay. Fair enough. Regarding the personnel line which you talked about a moment ago, $1 million sequential decline, part of a seasonal payroll stuff, but you also highlighted in the press release that there was a higher level of capitalized loan origination costs. Does that just simply relate to new hires that became productive during the quarter and that is why you were able to start capitalizing their cost?

No. That is really -- Gary, hi, this is Ed. That really goes along with our loan production levels as new loans come on and loans are renewed, we capitalize and have to defer those loan costs. As production increases, we get to capitalize a greater deal of those salary expenses and when you capitalize them, of course you credit salary expense and debit deferred loan costs.

All right. Okay. It is not new producers, it is just increased production.

Yes, increased number of loans. This is in line with the FASB 91. We have to do almost nearly scientific calculations quarter by quarter depending on the number of loans and the type of loan we produce.

Right. Okay. That's fine. Thank you very much.

Thank you.

Tim Coffey, FIG Partners.

Good morning, gentlemen.

Hi, Tim.

You have had a pretty good tail on recoveries within the loan portfolio, especially commercial land. Is that nearing an end, or do you see a little bit more going forward?

There is a little bit more going forward because we know there's and end, because we are in charge of the entire thing. The thing is based on the premium schedules coming down. The next payment will be next spring, probably with a complete payoff. If that is to occur, we probably will have an additional $2 million or more recovery. Some of them will be interest income, because interest could be recovered last.

Okay. What is the timeframe on that, you said?

Next spring. April.

Okay. How does that affect, if at all, your provision expenses going forward, if you exclude the SNiC from this quarter?

That probably will create an increase in reserve situation. Then again for that quarter, maybe we have a beneficial provision (technical difficulty). It all has to be measured within how loan grows in the second quarter of 2017.

Right. Okay. Thank you. The rest of my questions have been answered.

Okay.

(Operator Instructions)

We have no further questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Yu for any closing remarks.

Thank you so much for your continuous interest and continued support of the Bank. As we always will be dedicated to the best interests of our shareholders. Thank you.

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