Q2 2015 Preferred Bank Earnings Call

Jul 21, 2015 AM EDT
PFBC - Preferred Bank
Q2 2015 Preferred Bank Earnings Call
Jul 21, 2015 / 06:00PM GMT 

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Corporate Participants
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   *  Kristen Papke
      Financial Profiles, Inc. - SVP and IR Contact
   *  Li Yu
      Preferred Bank - Chairman and CEO
   *  Wellington Chen
      Preferred Bank - President and COO
   *  Edward Czajka
      Preferred Bank - EVP and CFO

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Conference Call Participants
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   *  Mat Schaefer
      D.A. Davidson & Co. - Analyst
   *  Carlos Velasquez
      FIG Partners - Analyst

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Presentation
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Operator   [1]
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 Good day, and welcome to the Preferred Bank second-quarter earnings 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 over to Kristen Papke, Financial Profiles, Investor Relations. Please go ahead.

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 Kristen Papke,  Financial Profiles, Inc. - SVP and IR Contact   [2]
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 Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the second quarter ended June 30, 2015. With me today from management are Chairman and CEO, Li Yu; President and Chief Operating Officer, Wellington Chen; and Chief Financial Officer, Edward Czajka.

 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 now like to turn the call over to Mr. Li Yu. Please go ahead.

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 Li Yu,  Preferred Bank - Chairman and CEO   [3]
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 Thank you. Good morning, ladies and gentlemen. My name is Li Yu. Welcome to the earnings conference call. For the quarter ended June 30, 2015, our Bank earned a net income of $7.6 million. This is the highest of our corporate history. On the per-share basis, we earned $0.55 for fully diluted share as compared to $0.45 for the same quarter a year ago. This is a 22% improvement.

 This quarter's earning was enhanced by a special dividends of Federal Home Loan Bank in the amount of $227,000 and a gain on sale of OREO in the amount of $325,000. Without these two, we would've earned $0.53 a share, which is still well above our own internal expectations.

 With the sale of OREO, our total nonperforming assets is now a little bit less than $8 million or a little less than 40 basis points or 0.4% of our total loan portfolio. More importantly, the classified [ex] total now stands a little bit less than $11 million, which is equal to about 60 basis points of our 0.06%.

 A bright spot of the quarter is loan growth. For the quarter, our loan grow $78.5 million in spite of a very large payoff activities seems to be -- which seems to be the norm of the industry. Deposits, however, has grown only $25 million or 1.4% on the linked quarter basis.

 With the faster growth in loan and slower growth in deposits, the leverage ratio has changed. And also aided by the Federal Home Loan Bank dividends, our net interest margin improved in this quarter to 4.01%.

 Another bright spot of the quarter is our efficiency ratio. It now stands at 39%, partially because of the expended net interest income. But more importantly, because of the overhead controls intact, our net interest income is -- seems to be a recent quarter low of a net interest margin -- recent quarter low of -- I mean, I'm sorry -- efficient ratio of recent quarter low of 39%.

 We are also pleased to announce that we have entered into an agreement to purchase all of the assets -- all of the stock of Bank of New York United International Bank in Flushing, New York. We are excited about entrance into this all-important market. We are going to continue to do what we have been doing in California, but now we have a one new area for us to expand our activities.

 The transaction will be, after the first two -- well, two or three months -- will be immediately accretive. And the book value dilution is very, very minor, and which should be earned back within a one-year period. So with this acquisition, we are really feeling that our future -- I mean, still holds a very positive outlook for our future.

 Board of Directors and the management wants to thank you for your attention to our Bank and thank you for attending the conference. Now we are ready for your questions.

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Questions and Answers
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Operator   [1]
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 (Operator Instructions) Mat Schaefer, D.A. Davidson.

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 Mat Schaefer,  D.A. Davidson & Co. - Analyst   [2]
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 This is Mat calling in for Gary. Just on the deal, how -- once the deal is closed, how would you think about investing further in that market? I mean, would you want to rapidly build it out or take your time --?

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 Li Yu,  Preferred Bank - Chairman and CEO   [3]
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 Oh, we don't have any specific so-called pace of investment today. We have confidence the people that we acquired over there can expand the activity to more than what they are presently doing. But the growth of the -- of their activity will be, if it's around the long side, will have to be on a credit quality first type of basis.

 But the management in Los Angeles is ready to give them all the support they needed. And whatever their activity can lead to, we will support them.

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 Mat Schaefer,  D.A. Davidson & Co. - Analyst   [4]
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 Okay. And then for further M&A opportunities, would you want to wait and focus on this deal? Or would you be immediately looking at other opportunities as they came along?

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 Li Yu,  Preferred Bank - Chairman and CEO   [5]
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 We have been presented with a number of deals on a very, very preliminary basis. And from now on, we're going to continue to look at opportunities. And because this transaction is relatively small and relatively simple, we believe the implementation of this transaction is not going to be time -- as time -- I mean, consumption -- as time requirement for us as a large deal will be. So, we will be looking at other things on a pretty immediate basis.

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 Mat Schaefer,  D.A. Davidson & Co. - Analyst   [6]
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 Okay, great. Thanks. That's all my questions.

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Operator   [7]
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 Carlos Velasquez, FIG Partners.

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 Carlos Velasquez,  FIG Partners - Analyst   [8]
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 This is Carlos on behalf of Tim Coffey here at FIG Partners. Just a couple of questions. Do you guys anticipate a slowdown in warehouse lending that could potentially weigh on loan growth? And if you do, what are your plans, if you have any plans to store, to offset any potential headwinds?

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 Li Yu,  Preferred Bank - Chairman and CEO   [9]
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 Obviously, I will ask Wellington to answer that a little bit later, but we do not have that much warehouse lending to start with. And activity has been slowing down in the past one year for what little portfolio we have. Okay. So, Wellington, anything to add?

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 Wellington Chen,  Preferred Bank - President and COO   [10]
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 No. I think that's very accurate. It's right on the button.

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 Carlos Velasquez,  FIG Partners - Analyst   [11]
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 Okay. And just a further question. How much more of an increase in the cost of deposits should analysts be considering going forward? How much more expensive do you think deposits will get?

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 Li Yu,  Preferred Bank - Chairman and CEO   [12]
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 Well, there is all kind of school of thoughts on the marketplace. Okay. If you listen to -- I mean, our most recent one is the CFO of Chase Bank was saying that he thinks the deposit cost will be increased faster than we think. So how much faster? He has no answer either. Okay.

 And the regulator has been speculating that there will be large shifts from DD&A to the TCD area. And again, we have not been provided any guidance as to what that specific dollar amount is. And I can say that we will -- it is one of the very high priority in putting our attention to be market-effective and to be market-reactive all the time.

 And Ed, do you have anything to add on?

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 Edward Czajka,  Preferred Bank - EVP and CFO   [13]
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 Yes. Our -- Carlos, just so you know, our cost of deposits over the last three quarters has been very, very stable. It's actually come down a few basis points from two quarters ago. So we are still seeing a very stable cost of deposits, although some of that has to do with the mix of deposits that we are growing as well.

 As Mr. Yu said, there is a lot of speculation out there that the interest rate increase that is forthcoming on the liability side will be faster than it has been in previous cycles. Couple that with possibly cannibalization of BDA deposits and the time deposits, and you could see banks may not be getting the same pop in their net interest margin that they may think they are going to get.

 We do a lot of modeling in that area. As a matter of fact, we provide for a lot of attrition out of DDA as well. So we are fully prepared. But again, we think it will probably go up faster than in previous cycles.

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 Carlos Velasquez,  FIG Partners - Analyst   [14]
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 Okay, great. That's all I have on my end.

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Operator   [15]
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 (Operator Instructions) This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Yu for any closing remarks.

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 Li Yu,  Preferred Bank - Chairman and CEO   [16]
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 Well, we had a very good quarter, and certainly we have some new excitement coming our way. So that thank you for attending the conference. And if you have any question, please call us. Thank you very much.

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Operator   [17]
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 The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.




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