Preferred Bank (PFBC) 2017 Q4 法說會逐字稿

Good day, and welcome to the Preferred Bank Fourth Quarter 2017 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. Please go ahead.

Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the fourth quarter and year ended December 31, 2017. 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 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. Please go ahead.

Thank you. Good morning. With President signing the new tax law, we are required to reevaluate or revalue certain assets, which included deferred tax assets and the market-based lending, low-income housing market assets. The result is that there'll be a $6.65 million charge in this quarter or $0.45 per share. Without this charge, net income for the quarter would have been $14.3 million or $0.97 per share, which is a all-time high for the bank. Expansion of net interest margin, expense control and lower tax rate all contributed this better-than-expected performance. Deposits for the quarter grew 2.1%, which is lower than the past quarters. One of the reason is that we choose not to renew a $45 million rate-listing service deposits. In fact, since the beginning of the year, we've been consciously -- conscientiously reducing this segment of the deposits. As of December 31, we have $550 million cash on hand, which should be sufficient to meet any loan-funding needs.

Loan growth for the quarter was 2.2%, which is also lower than the previous quarters. We're still experiencing an increased level of payoffs. Again, the holiday season sluggishness also contributed to this lower growth rate.

At December 31, we have raised $33.5 million of new capital through the at-the-market mechanism. This has greatly improved our capital ratio. We do expect to raise another $16.5 million in the first quarter, okay, which will be with the new capital, should be sufficient to meet the future needs.

During the year, we have also increased our labor force, our workforce, by 11%, mostly in the area of compliance, BSA, digital banking and other administrative areas. Together with the staff increase in 2016, we believe we now are well situated or well prepared for 2018.

2017 has been a very busy year for Preferred Bank. Loan grew 16%, deposits grew 18%, and the pretax income grew 39%, which is much better than what we have internally expected and also, much better than the market consensus. Good profit matrix and highly asset sensitive assets, the prospect of realizing and the lower tax rate, we're very optimistic for 2018.

Thank you. Now I'm ready for your questions.

(Operator Instructions) The first question comes from Aaron Deer with Sandler O'Neill and Partners.

The -- I guess, let's start with the ATM. Obviously, that's been a very successful tool for you guys to raise some funds and it continuing that this quarter. Given the payoffs, the chad in commercial real estate, I'm just curious, with the higher capital ratio that you have now, where does your CRE concentration number stand?

I know that -- Nick, you want to answer the concentration number?

Yes. For December 31, our concentration is 310%.

9 point plus, right?

Yes.

Okay, and then the -- I was also -- great to see you guys continue to see some great inflows on the noninterest-bearing deposits. Just given, it sounds like you're pretty comfortable with your liquidity and your funding levels. Is it your expectation that you can continue to see these good tractions that you've had with the lower cost deposits as we head into 2018? Or are you starting to see customers demand more on the right side there? Or what are your thoughts on that front?

Second part is what we have always been expecting. So far, is it not happening, especially as of December 31. With the new tax law changes, many people is doing their tax planning, okay? Some of them is switching their higher-rate deposits, lower-rate deposit, ready for the disbursements in the new year. Some of them are -- is moving a large deposit in, and so that they -- let's say, they distribute what would have been a bonus for 2018, they will distribute in 2017. Then the larger activity is doing that, it's hard to tell, at this point in time, what the level of stability will be, okay? Obviously, in our model of doing business, we'll continue to work our officers, to make them work to increase the noninterest-bearing deposits.

Okay. And then the commercial and industrial loan balances, they saw -- also saw some strong growth this quarter. Can you talk about what drove that in terms of any specific industries, or if there was participations or anything that helped support that this quarter?

You want to answer it first, Wellington, and I'll add up to it.

Yes. We have a very little participation activity, really flat for the fourth quarter. So these are the -- the industry is really, we've dealt with the -- some of the import/export trading and as well as communication company. So as you know, Aaron, that the C&I business takes a while to fill the relationship, to bring them in. So as this happened, I think, in the fourth quarter through the whole year of work that we're able to work on a few more deals on the book.

Also, a little bit increase the drawdowns by a slight amount, because some of them launched with people, more expenses at year-end. And I'm...

Okay. So you could probably see, maybe, a little bit of pressure then in the first quarter, as maybe some of those draws pull back to a more normalized level on the utilization?

Yes. It possibly -- it can. But in the meantime, we have many loans that were dropped off from fourth quarter here into first quarter, and we were already booking them, pretty much, in the first 15 days.

The next question comes from Steve Moss with B. Riley FBR.

You kept expenses well controlled here this quarter and throughout the year. Just wondering, how should we should think about investments in the franchise in 2018 and expense growth?

Well, our consensus is that our earnings is ahead of the growth of our workforce. We hope we continue that in 2018. But we are planning to increase our production staff, which is a relationship officer and supporting staff for the business in 2018 to more than what we have done in 2017 or '16.

Okay. And in terms of how many loan officers are you looking to hire? Is there any particular focus?

Well, can I be a little bit [percisious] with you? We like to hire 100 people, maybe some time, maybe the 3 or 5 available. It is really a so-called opportunistic type of a situation. The only thing is that we make it our conscientious effort, this year, to increase our recruiting activities and including our recruiting budget -- increase our recruiting budget.

Okay, appreciate that. And with regard to your asset sensitivity here, I know you had loans that were at floors last quarter, I'm assuming, the variable rate mix here is higher. I'm just wondering, what's the variable rate mix, and how should we think about the margin for the first quarter.

(inaudible)

Sure. As of right now, obviously, the rate increase helped us in the month of December. We did see some yields on loans overall increase. In terms of where we stand now, there is approximately only $119 million of our total adjustable rate of about $2.7 billion that are below their floors. Of that, $74 million comes off the floor in the first 25 basis point hike. So we're very close to having pretty much most of, if not all, the portfolio up off the floor.

Okay. And so 79%, 80% of loans, at this point, are variable rate, if I'm correct, right?

Yes. Little over 80%.

The next question comes from Gary Tenner with D.A. Davidson.

Just wanted to talk about the loan growth a little bit. Li, you mentioned getting commercial real estate, obviously, some high levels of paydowns in the fourth quarter. Can you give us a sense of what the gross originations were in the fourth quarter, maybe compare that with the prior quarter or the year ago quarter?

I'd like to recall on the several things. Number 1, our origination in fourth quarter is really higher than our origination in the third quarter, but there's more payoffs in the fourth quarter, okay? But I do also want to clarify one thing, okay? Because the holiday season, roughly $35 million, roughly, of that amount has been pushed into January, it's getting to close in December. Therefore, as a result, if you take the pipeline at the beginning of January and at the beginning of September -- October, you see a increased pipeline by more than that number, okay? So it is, sometimes kind of a moving situation out of our control, because sometimes some people just went on a vacation. Suddenly, they're not signing the paper until January 2. So this -- whatever it is, I mean, that's -- that just happens.

Okay. And then to go back to the expense discussion, I think you reported that the bonus accruals were lower here in the fourth quarter. So certainly, the run rate in the fourth quarter, we should expect that to move higher, beginning Q1, correct?

It was slightly higher in [2017] because earnings will be higher in 2018. Our bonus volume is highly related to the income, okay? We have a philosophy that the -- all the employees and everyone, including frontline tellers will have a bonus, okay? They belong to the bonus pool. So everybody shares that particular bonus. As the company's profit rises, the bonus pool get larger until hit a certain target rate that the Board of Directors preset, okay, in a situation. Then we start to look at, maybe, moderating the accrual under the bad debt. So that's happened in the fourth quarter. The first quarter will be normal and probably, will be higher once accrued than the first quarter of 2017.

It will be higher than it was in the first quarter of '17?

Yes, because earnings will be higher.

Okay, great. And then just one last quick question, just on tax. Had you guys -- I didn't see in the press release in terms of guidance or indication as to where you expect your effective tax rate to shake out for '18.

Well, there's a reason you didn't see it, Gary. At this point, it's a little bit early to tell. But just purely by doing the math from where we have been, we would expect it to be in the upper 20s. Let's put it that way.

The next question comes from Tim Coffey with FIG Partners.

Look at the deposit portfolio, are there any other types of deposit, I guess, rates and specialty you ran off this quarter that you look to reduce again next quarter?

Between -- we think we have a pretty good situation right now. Between the rate-listing service and the so-called the broker deposits, which we like to keep it very short, okay? Combined together, little over 5% of the deposit total portfolio.

Okay. So not really not much to go there. And do have an update on the OREO property located outside California?

It's still in escrow at almost twice the carrying cost. We certainly -- it's supposed to close in late January, okay? I'm holding my breath and hopefully to close it. But the market value of the property seems to increase all the time, okay? So if it happens, we would have an extraordinary income or nonrecurring income, largely incurred in the first quarter.

Okay. And then because of not exactly where are the mechanics of your ATM. Is that something that you would like to get completed early in the first quarter, or something that you'd willing to stretch out the entire quarter?

We will evaluate the situation right now to see whether we are going to start to do it right now or maybe later, okay?

(Operator Instructions) The next question comes from Don Worthington with Raymond James.

Maybe follow-on to the tax question. If you take a look at where you think you might deploy the benefits of a lower tax rate, in terms of deploying it into business, increasing dividends, things of that nature.

Well, first question of the deployments already been done, which is to the employees, okay? And our employees will find that we have, obviously, raised budget, and we have since increased raised budget. The second situation we're reviewing that insurance allowance to the employees, okay, which is being announced to all the employees. Third of all, we are definitely, as the income increases, employee share biggest bonus pool through the yearend bonus, okay? So these are the 3 things to them. And as the earning coming along, we will continue to evaluate with the growth, okay, growth rate and then the requirement of the capital for the growth rate. If -- obviously, if there is, frankly, leftovers, we will certainly do the things that are shareholder friendly.

Okay, great. And then in terms of loan growth, would you expect to be able to achieve, say, double-digit loan growth in '18?

It sounds like a guidance, but can I say that it is my personal wish? My personal wish, as we're looking on, try to hire more people to join the bank and in the frontline production side, my personal wish, we should be going to the mid-teen level. But as the bank's assets continue to grow, I must also be realistic that the same constant rate cannot be maintained forever. Well, so it's a situation that we certainly like to keep it higher than the 10% level, okay? How high it is, it is really depend on market situation, in our own expansion of the production floors.

(Operator Instructions) Our next question comes from Christopher Hillary with Roubaix Capital.

Could you highlight it to us where you see the best opportunities to grow loans, and then perhaps, conversely if there is any area in the market where you might say, you'd expect to see slower growth or contraction?

Well, okay. We likely to see next year that -- we have very limited amount of growth in home mortgages, which is a new department that we established late 2016, early 2017, okay? But the dollar amount growth has been very, very limited, okay? So certainly, that's one area that will probably see a little bit more growth. And our traditional strong points, the C&I and the CRE, obviously, that -- we want to make a loan in a custom manner, and we certainly like to continue to do that. But it just seems to me that in recent activities that the competition for these loans are getting stronger, because there, some of our friendly competitor is thinking that the deploying the tax saving into customer-friendly, meaning lower rates loans, okay? So something that not a lot of variables, we just have to -- we will see. But our business, highly one-off, one custom-made type of business. And it is very hard to predict that how much percentage we'd like to grow in which area. I'm sorry, but I know, but that's not a wishy-washy answer you were looking for.

Our next question comes from Tyler Stafford with Stephens Inc.

I just have a couple of questions, I don't think they've been asked, but I apologize if they have been. Have you or did you provide the FT adjustment impact for the first quarter that will, from the securities yield standpoint, that will hit this municipal portfolio?

No, we have not disclosed that all, we haven't assessed that as of yet, but it's going to be rather small.

Okay. And then any thoughts just where -- with the tenure is at now, in terms of putting some of this liquidity to work outside of the cash position into a higher-yielding securities? Have you guys reached that point yet?

Could you people got, I mean, give us the lead how to get some high yielding security? I've been looking for 3 years. And with the prospect of continued rate rises. If you think of the everything we're committing to, we end up losing the face value, okay? So we have been biting the bullets, and keeping them intact. And thank heaven that other parts of the bank is doing okay. So we still have effective 17% return on equity. So we wait for our chances to come up.

Seeing no further questions. This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Li Yu for any closing remarks.

Thank you so much for joining the conference. As I said that we had a good year 2017, but we think we're going to have a better year in 2018. Thank you.

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