Preferred Bank's CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.23.13 | About: Preferred Bank (PFBC)

Preferred Bank (NASDAQ:PFBC)

Q3 2013 Earnings Call

October 23, 2013, 2:00 PM ET

Executives

Kristen McNally - Investor Relations

Li Yu - Chairman and Chief Executive Officer

Wellington Chen - President and Chief Operating Officer

Edward Czajka - Executive Vice President and Chief Financial Officer

Lucilio Couto - Executive Vice President and Chief Credit Officer

Analysts

Aaron Deer - Sandler O'Neill & Partners

Gary Tenner - D.A. Davidson

Don Worthington - Raymond James

Tim Coffey - FIG Partners

Operator

Good day, ladies and gentlemen, and welcome to the Preferred Bank's third quarter 2013 conference call. (Operator Instructions) I would now like to turn the conference over to Kristen McNally.

Kristen McNally

Thank you. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the third quarter ended September 30, 2013. With me today from management our 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 if 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.

Li Yu

Thank you. Good morning, ladies and gentlemen. I'm very pleased to report our third quarter net income of approximately $5 million. This is the best quarter we had for a long time. Although, this quarter is aided a little bit by a small over-accrual that was happening in the second quarter, as we discussed earlier in the last quarter's result. The results' is very gratifying because that confirm our own feeling all underway.

This quarter's highlight is really in our loan production. In this quarter, we have a heavy, heavy, heavy loan payoff, roughly $110 million loan of our old portfolio was paid off, but we produced a new commitment about $250 million, whereas it's about roughly $170 million outstanding. And more importantly, our new loan production has been kept in a proper proportion as our current portfolio is roughly 30% to 33% that was in the C&I and the divestments in the real estate side.

This quarter also was featuring that a relatively large loan loss provisions paid. Based on the net increase on loan amount, we probably need $700,000 to $800,000 of new provisions. But in light of the new FSB announcement of a controller terms is indication that likely future loan losses provision were likely to increase a lot. We've decided to be a little bit more proactive. This is also taken into the consideration, in the quarter we had about $600,000 of recovery.

We have maintained our net interest margin and improved it a little bit. Some of the improvement is because of the better leveraging of our loan and deposit ratio. But most of all, we have been keeping our loan rates and our cost in checked. So all-in-all this has been a pretty good quarter for us and looking forward we are equally as positive about future quarters as we've seen this quarter.

Now, we're ready for your questions. So please take it away, operator?

Question-and-Answer Session

Operator

(Operator Instructions) And our first question is from the line of Aaron Dorr with Sandler O'Neill & Partners.

Aaron Deer - Sandler O'Neill & Partners

It is really impressive loan growth in the quarter, particularly in light of the past that you had. Can you talk about what kind of rates you're getting on those new loans? And how those yields compare to what you've been booking over the past couple of quarters?

Li Yu

Well, our loan yields in this quarter is slightly better than the loans yields we were booking in the second quarter, but comparable to the loan yields we were booking in the first quarter. And roughly our new loan yields is maintaining a little bit over 4% net interest margin as a combined basis.

The reason is that in the second quarter what we see is a huge amount of payoff activities that started, before it payoff our loans. And it seems to be that that movement is tapering down. And however, the loan yield has been decisively about the same in the first quarter, a little bit lower than what we're booking in net last year.

Aaron Deer - Sandler O'Neill & Partners

And then I gather from your comments that the pipeline looks pretty good, have you been continuing to add personnel and teams to help keep this growth trajectory ongoing?

Li Yu

On one end, we have confidence in our current staff that was [indiscernible], and we are adding new people and we're thinking about new lines, new locations and these kinds of things.

Aaron Deer - Sandler O'Neill & Partners

And then lastly there is a point in the press release, it looks like there is an MOU entered into recently, can you talk about what's behind that?

Li Yu

Well, actually that was pretty much in the same line of MOU as last year, but without the requirement of bringing down the classified access, because we're pretty much in line and we're continually improving. And we think we're well below what has previously we've acquired. The only thing is that was adding to it some BSA items.

Aaron Deer - Sandler O'Neill & Partners

And I've gathered you've taken some steps to mitigate any issues on that front?

Li Yu

That's our job.

Operator

Our next question comes from the line of Gary Tenner with D.A. Davidson.

Gary Tenner - D.A. Davidson

I had a couple of questions. First on your comments on the reserve, having bolted a little bit more this quarter, should we assume from that that you don't let the reserve percentage drift down, say below of 140 levels, is there now a certain artificial level that you'd like to keep it above for some period of time?

Li Yu

Well, first of all, I will ask Louie to add more. And from my point of view is that we're constantly putting a battle. We try to be as proactive as possible by tracking all of these so called the reserve amount from the loans. So therefore, our non-performing loans or classified loans, most time carry on the book on the net basis without reserve related to it.

So the pure reserve based on the calculation of FASB-5 and FASB-114 has been back and that is pretty sufficient. And as we go forward, we try to put away a little more in light up to what the new development by FASB is and so on. But at certain time, our CPA will have to tell us to stop, because we cannot accumulate too much of big things that it become a so called unjustified.

Louie, you want to add something more to that?

Lucilio Couto

Yes. I think again as Mr. Yu has pointed out we have been transparent in our methodology and our approach and we're fully compliant on a GAAP perspective, and all the measurements were implemented in our bank. I think we're all sensitive internally to some of the regulatory comments about their expectations of where reserves should in the future based on their ideas of where they think the new models will lead the reserve.

And so we do not have an artificial floor. We do follow all of the outstanding guidance as far as, measuring both under the formally known FAS-5 and FAS-114. And given our declining levels of impaired loans or classified loans, we're comfortable that our reserves are very adequate at this time.

Gary Tenner - D.A. Davidson

And then in terms of the MOU, the implications of that over the next few quarters, presumably you're waiting for the MOU be looked at previously to reinstate your dividend. With BSA issue now being at the forefront, I guess the current MOU, does that effectively delay that in this MOUs you looked at or could you appeal for the ability to reinstate a dividend?

Li Yu

We were hoping, we're working very, very hard try to get all the BSA issues behind us. We add a substantial number amount of staff to brief about the problems and then realign our internal effort and put in a substantial amount of work. Wellington Chen is personally in charge of all the implementation of the BSA thing. We like to think that we're on our way to fully confine with the regulatory requirement. We're currently having outside consultant auditing, so that we want to make sure that we did everything right.

Wellington, you want to add something to that?

Wellington Chen

Yes. We added five additional headcounts, including assigning -- each branch has a branch liaison individual to work with BSA. It is the bank-wide effort. And aside from what Mr. Yu mention about [indiscernible] Consultant to analyze our staff quality as well as we'll utilize our FDIC's assistance, and what they call a MDI, the Minority Deposit Institution, they also come in and discuss. So we are on top of this issue, Gary.

Gary Tenner - D.A. Davidson

In terms of the new ads and I guess the third-party consulting, are those costs fully reflect in the third quarter or should we expect to see some increase in professional services or [indiscernible] fourth quarter?

Edward Czajka

Gary, I would say a large proponent of that is -- this is Ed speaking, a large proponent of that is already reflected in the Q3 numbers. We don't really expect it to be material going forward in terms of the overall expense ratio for us. So your Q3 run rate from that standpoint from those line items that you talked about is going to be fairly indicative going forward, it might be just as little bit higher.

Operator

And our next question is from the line of Don Worthington with Raymond James.

Don Worthington - Raymond James

Mr. Yu, you mentioned looking at alternative locations, we interpret that to mean branches or you're looking at loan production offices. And if so, where they might be?

Li Yu

We're basically looking at branches. We are evaluating several areas that we could expand to. And that we're ready to sending our application once we got everything all planned. We're ready to asking for regulators to approve us to have branch over there. And last year if you remember we added San Francisco branch. This year we're thinking about to apply for new one, probably will be operation sometime in the second quarter of 2014.

Don Worthington - Raymond James

And then in terms of the company's time deposits, any color on how much of that you would consider to be a wholesale versus your retail customers?

Li Yu

Traditionally we have a TCD portfolio, which is quite stable, because our average length of our so called, what you call, the retail portfolio of experience with us is more than six years relationship with the bank. And we have in the past have always been tried to keep our current customers intact. There is a little bit wholesale portfolio, but among the total deposits is -- total deposit it's not significant.

Operator

And our next question is from the line of Tim Coffey with FIG Partners.

Tim Coffey - FIG Partners

To follow-up on Don's question about the deposit portfolio, do you see the overall composition of that portfolio shifting towards more interest bearing deposits in the near-term?

Li Yu

Tim, if the interest rate is in the current situation level within the near-future, we don't see much of a change, because the fact that DDA is not yielding a whole lot of money. I mean, TCD is not yielding a whole lot of money as compared to DDA. But if the yields curve changes, we expect there will be some shift into the TCD portfolio, that's item number one foremost. Second of all is that if our growth that in the loan side on the basis is exceeding our planning that we might from time-to-time add a little bit of TCD and later on work it off.

Tim Coffey - FIG Partners

But currently no big affects from, say, increased competition within your marketplace for deposits?

Li Yu

No. Currently, we don't see that.

Tim Coffey - FIG Partners

And then, as it relates to your non-interest income, is what we saw this quarter kind of a good run rate or?

Edward Czajka

Going forward in terms of non-interest income, from the standpoint of service charges and fees, trade finance income, service charges and fees is probably fairly indicative going forward. Trade finance income was probably a little rich this quarter and then the others are fairly stable going forward. Obviously, we had the loss on sale of securities in there. It's obviously a non-recurring item. So I guess you would use those comments for your model going forward.

Operator

And there are no further questions at this time. So I will turn it back to management for any closing remarks.

Li Yu

Thank you very much. It's a long hard road for us. We're finally back to seeing ourselves at getting back to 1.2% ROA and over 10% ROE with oversized E. So as we're going forward, we have certainly dedicated ourselves to continue to improve our earnings and our balance sheet. Thank you very much.

Operator

Ladies and gentlemen, that does conclude your call for today. Thank you for your participation. You may now disconnect.

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