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Preferred Bank (NASDAQ:PFBC)

Q4 2013 Earnings Call

January 23, 2014 2:00 PM ET

Executives

Tony Rossi – IR

Li Yu – Chairman and CEO

Analysts

Aaron Deer – Sandler O’Neill & Partners

Edward Czajka – EVP and CFO

Timothy Coffey – FIG Partners

Gary Tenner – D.A. Davidson

Operator

Good afternoon, ladies and gentlemen and thank you for standing by. Welcome to the Preferred Bank’s Q4, 2013 Earnings Conference Call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session with instructions provided. (Operator Instructions). I would like to remind everyone that this conference call is being recorded.

I would now turn the presentation over to Tony Rossi of Financial Profiles. Please go ahead, sir.

Tony Rossi

Thank you, John. Hello, everyone, and thank you for joining us to discuss Preferred Bank’s financial results for the fourth quarter and the full year ended December 31, 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 may be made by management that 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. Please go ahead.

Li Yu

Thank you. Good morning or good afternoon wherever you are. I’m pleased to report the fourth quarter earnings of $5.9 million or $0.44. This is the highest we’ve had in the last five years and certainly compares very favorably with, I mean the last quarter, and the quarter, same quarter year before.

During the quarter we had good success in the disposition of our non-performing assets. It reduced by $9.2 million or nearly 40%. The most important part is that all these dispositions resulted in a net gain of $2.2 million. During the quarter we took some precautionary move or proactive move to our investment portfolio. We sold some of the security that we feel has the long – I mean they are the most sensitive to the long-term interest rate, rise in interest rate risk or loss.

We also sold out the CDOs that would not be allowable under the Volcker rule although after the sale the regulators may want to change their mind. In any event the CDO sales resulted in a $364,000 loss, plus a $120,000 tax charge that was the result of reversing DTA benefit spend. Today the Bank owns no CDO on hand.

We also did some proactive move in providing the loan loss. This quarter we provided $1.8 million loan loss provision which is probably $1 million to 1.2 million more than what will be needed to meet the gross provision need spend. It seems extremely odd when you consider the disposition of non-performing assets resulted in a net gain. But we feel though as the upcoming new rules under the FASB and also the various comments made such as by the Controller of Currency there is lot of uncertainties ahead of us within the methodology of calculating the our loan loss reserve. So we would like to be a little more proactive on that.

Every market is reviving or recovering, other than the export activities, tourism that I mentioned in the press release. The most notable area is in the housing market where we see value has recovered a lot in the retail market. Three days ago the Los Angeles Time had a full page on the business section reported that in the middle segment of downtown, so called South Park which is a little segment nearby Staples center alone there is 27 new large scale housing projects and retail projects that either already broke ground or about to break ground.

We are very positive, very hopeful that the loan demand will be there in future. Meanwhile we are comfortable with our $40 million new production in the fourth quarter when we take into consideration of the holiday period that always delays some of the closing.

Throughout the year we also recognized that the short interest rate environment, low interest rate environment may not be there forever. So with some precaution we are proactive to move. First of all we made a policy that we will not compete in the loan market for low long-term fixed rate loans. And for the fixed rate loan we did, in the fixed rate loans we did on the reasonable rate we have tried to match it up with the same maturity PCB deposits of Federal Home Loan Bank advances.

Today only 5% of our loan portfolio is fixed rate, not covered by the same maturity depots. And generally they are of a shorter duration representing the legacy loans of the old years. We think we are very well positioned for – to take advantage of the rising interest rate environment. If it is going to happen soon. If not we are perfectly happy to offer it under our current net interest margin that is because we’re also very have a very comfortable efficiency ratio.

Management team of Preferred Bank remain positive for our future, especially we’re very positive about 2014. Thank you very much. We are ready for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question today will come from Aaron Deer with Sandler O’Neill & Partners. Please go head.

Aaron Deer – Sandler O’Neill & Partners

Good morning guys.

Li Yu

Good morning.

Aaron Deer – Sandler O’Neill & Partners

A question on the margin, how much of the margin compression you had this quarter would you attribute to the excess cash that we saw in the quarter I guess kind of like back of the envelope suggests that you guys could see a decent bounce back in margin of seven to ten…

Edward Czajka

Pretty much about 90% of that was due to the large amount of cash we had and that basically took place during the balance of the quarter. Those balances came down a little bit at the end of the quarter but during the quarter the cash balances were quite significant.

Aaron Deer – Sandler O’Neill & Partners

That sounds like you should see a pretty good pick up here in the first quarter. Okay.

Li Yu

Just to add on we probably will be very, very careful in trying these, these excess cash because it is still, I still consider kind of being prudent to putting in the investment portfolio at this time.

Aaron Deer – Sandler O’Neill & Partners

That’s a good point. So my guess is to the extent that you are buying any securities or continue to keep those pretty short especially given the loans you have opportunity for that.

Li Yu

We’re trying to find it, it’s very hard to find one that will not lose value as time go on.

Aaron Deer – Sandler O’Neill & Partners

All right. Okay. And then Ed on the tax line I know there is a little bit of noise in there but the effective yield for the year was around 39% is that, that seems like pretty good run rate here on a go forward basis?

Edward Czajka

Yes Aaron that should be a big run rate may be slightly below that we may do another loan come out in cash credit project during 2014 that would have the effect of lowering that. Obviously depends on what time during the year we execute that. But I think that’s a safe run rate going forward.

Aaron Deer – Sandler O’Neill & Partners

Okay. And then just lastly in your comments we had talked about the taking the prudent step of kind of boosting your reserve a little bit here. Is it likely that you continue to raise that reserve level in terms of the allowance as a percentage of loans or are you comfortable with where it is here?

Li Yu

First of all I am comfortable it is – where it right now because we do have a so called, I would call an unallocated reserve not specifically allocated that’s why we are working it, but going forward in our budget we have made a little more, I mean switching of the provisions, as compared to our planned goals.

Aaron Deer – Sandler O’Neill & Partners

Okay. Great, thank you very much appreciate you guys taking my call or taking my questions.

Edward Czajka

Thanks Aaron.

Operator

Your next question on the line will come from Tim Coffey with FIG Partners. Please go ahead.

Timothy Coffey – FIG Partners

Hi good morning gentlemen.

Li Yu

Hi, Tim.

Timothy Coffey – FIG Partners

I had a question about kind of your expectations for loan growth, I know in the comments about you said that there is a few loans you mentioned directly on the call. Given the loan growth that you saw during ‘13 was that mostly the low hanging fruit or do you see more opportunities out there?

Li Yu

I can apply to…

Edward Czajka

No that was the low hanging fruit during 2013 in terms of loan growth?

Li Yu

No, we don’t really think so because as you can see that, as you can see throughout the year we’ll be maintaining a net interest margin on the margin compression environment as compared to many of our peer group we are the one of very few people that was able to hold it. So we are not reaching the low hanging fruit over there but we try to do is that we have a very large production staff as compared to our peer group.

And we are not source a whole lot of more deals and generally speaking that we only do deal that meets our underwriting criteria first and also meeting our – criteria.

Timothy Coffey – FIG Partners

Okay,

Li Yu

Sorry, Tim. You were coming in very clear Tim that’s what we heard. Thank you.

Timothy Coffey – FIG Partners

Thanks.

Operator

Your next question will come from Gary Tenner with D.A. Davidson. Please go head.

Gary Tenner – D.A. Davidson

Good morning. Just a couple of questions first on the excess liquidity and really as relates to sort of deposits towards the end of the year. Have you seen any initial outflow over those deposits early in 2014 or have they remained at the bank?

Li Yu

We see the normal outflow roughly about $20 million so $20 million to $30 million and part of it has already flown back. It’s very traditional, lot of other small companies like to lighten the check at the end and clear in the early part of the quarter.

And gradually start to build up in this situation actually we anticipate at March 31st there will be some build up and April 15 there will be some quick reduction as regards we’ve got tax [paying] company. It’s in and out we’re happy that outflow is very limited and not abnormal.

Gary Tenner – D.A. Davidson

Okay. Thanks for that and then just I wonder if you could update your progress on the regulatory issue on the I think the Bank Secrecy Act and kind of what you’ve done on that end and whether we should think about any cost in 2014 related to beefing it up on those items.

Li Yu

The other costs that was related to that particular aspect, we think we have already incurred in the second half of the year. Whatever additional cost is in the future is will not be very significant. But however we treat this matter as the upmost importance. So in that case as necessary we’re spending a little bit more but would not be that significant.

Gary Tenner – D.A. Davidson

Okay, thank you.

Operator

(Operator Instructions). And your next question on the line will come from [Joe Steven] with Stephen Capital. Please go ahead.

Unidentified Analyst

Good afternoon gentlemen.

Li Yu

Hi, Joe.

Unidentified Analyst

First of all congrats on another very good quarter. My question was sort of going to dovetail on Gary’s was just to give us an update on the regulatory side, what you think about and then what about when is the next full scheduled exam for you guys?

Li Yu

First of all I mean you have to forgive us that when it comes to regulators we have to be, there’s certain limitation what we can say, okay. So having said that the next scheduled examination the last we know is July 7th.

Unidentified Analyst

Okay and then right now can you tell us the regulatory – if you have any regulatory agreement right now?

Li Yu

Well we still have an MOU technically yes. And we are operating with the various requirements on the BSA and other things on that. Although internally we feel we are very diligent and compliant to that.

Unidentified Analyst

Okay thank you and very good quarter gentlemen.

Li Yu

Thank you.

Operator

And your next question will come from John [Dicer] with [inaudible]. Please go ahead.

Unidentified Analyst

Good morning everyone.

Li Yu

Hi, John.

Unidentified Analyst

Following up on the last question when is your next comprehensive regulatory exam? Is it this spring or?

Li Yu

July the 7th.

Unidentified Analyst

Okay July 7, 2014.

Li Yu

Yes. They will arrive here.

Edward Czajka

That’s the last we know. You know they can change their dates okay.

Unidentified Analyst

Okay but that’s where we are now.

Li Yu

Yes.

Unidentified Analyst

Okay, good. And Mr. Yu in your prepared remarks you referenced some major developments close to the Staples Center I guess several housing projects, maybe some retail. Are you a lender on any of those?

Li Yu

We are a lender on very small portion of that. We are giving, I guess being a very small bank in a very big market we are having our share of the market.

Unidentified Analyst

Okay what type of loans are there and what’s your dollar exposure there?

Li Yu

Well our total dollar exposure on these new activity we have a lot of older, the new activity is no more than $10 million to $15 million commitment.

Unidentified Analyst

Okay and those are condominiums or retail or what type of products?

Li Yu

Some of them common, some on the retail, some on the condominiums, and some are very, very, very hard to find parking lots. If you are in New York you know how that goes, right?

Unidentified Analyst

Yes, I understand. Do you envision that amount going up significantly?

Li Yu

We are subject to huge competition. Some of those projects is very, very large. It is out of our legal lending limit and we’re not being offered by lead banks the opportunity to participate or they have a rate we do not care to participate but to the extent we will be very high resourcing with many of the customers with we have relationships because we consider that’s a very good posh area.

Unidentified Analyst

Okay because I think we got into some trouble with this in the last cycle and I just want to make sure that…

Li Yu

Well a funny thing in real estate what was last and being troubled now become a heaven for many, many people that making huge amount of money, you know.

Unidentified Analyst

Okay, all right. I got you. Thank you.

Operator

And I show no other questions at this time. I would now like to turn the call back over to management for closing remarks.

Li Yu

Well thank you very much for your interest. We’re just very pleased that the bank is able to make increased earnings six quarters in a row and we hope the trend will continue and we’re very positive about the outlook for the market and for ourselves.

As I said we’re perfectly happy in operating in the current environment with our current net interest margin and the current low efficiency ratio. But if the rates is going to be increasing we are ready to take advantage of that. Thank you very much.

Operator

Ladies and gentlemen that does conclude our conference call for today. We thank you for your participation.

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