Q3 2017 Preferred Bank Earnings Call
Oct 25, 2017 AM EDT
PFBC - Preferred Bank
Q3 2017 Preferred Bank Earnings Call
Oct 25, 2017 / 06:00PM GMT
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Corporate Participants
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* Edward J. Czajka
Preferred Bank - CFO and EVP
* Kristen Papke
* Li Yu
Preferred Bank - Chairman, CEO and Company Secretary
* Nick Pi
Preferred Bank - Chief Credit Officer and EVP
* Wellington Chen
Preferred Bank - President and COO
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Conference Call Participants
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* Aaron James Deer
Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst
* Donald Allen Worthington
Raymond James & Associates, Inc., Research Division - Research Analyst
* Stephen M. Moss
FBR Capital Markets & Co., Research Division - Former SVP
* Timothy Norton Coffey
FIG Partners, LLC, Research Division - VP & Research Analyst
* Tyler Stafford
Stephens Inc., Research Division - MD
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Presentation
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Operator [1]
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Good day, and welcome to the Preferred Bank Third Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.
I would now like to turn the conference over to Ms. Kristen Papke, Financial Profiles, Investor Relations. Please go ahead.
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Kristen Papke, [2]
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Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the third quarter ended September 30, 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 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.
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Li Yu, Preferred Bank - Chairman, CEO and Company Secretary [3]
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Thank you. Good morning. I'm very pleased to report the third quarter of 2017 is a record for Preferred Bank. For the quarter, we earned net income of $13.7 million or $0.94 per share, which is substantially better than the last quarter and the quarter of last year.
During this quarter, we also are fortunate enough to have a recovery of interest income in the amount of $1.4 million, okay? Without that, our earnings would have been $0.88, but still is a record for Preferred Bank.
All the operating metrics seems to be very favorable. NIM, net interest margin, has expanded. On the going-forward basis, seems to be expanding 4 basis points to 3.79% and was still operating on a highly efficient level, approximately 35% efficiency ratio.
During the quarter, our loan growth has slowed down a bit from the past -- from past record -- from past experiences, okay? Largely because this quarter, we have facing with very heavy paydowns. And this quarter, loan growth is 13% on an annualized basis. Deposits growth also slowed down to about 9.2% on the annualized basis. Loan pipeline, however, is stable, pretty consistent with previous quarters.
As I reported in our press release, we are well under our way of a capital raising of $50 million. Until this time, we were told about -- roughly about close to 200,000 shares has been issued as of this minute, okay? We are confident and pleased with the report of the third quarter. And looking forward, we're also feeling optimistic. And with the upcoming tax cut, which we think is highly likely, that as a full rate taxpayer, Preferred Bank will reap a very good benefit. And going forward with our new capital increases, we should expand -- continue to expand at the reasonable rate, okay? More importantly, at this time that we're sitting on about roughly $0.5 billion of cash in our balance sheet, which should be sufficient to handle any additional loan growth in case it is needed.
So again, I'm -- we're optimistic. Management team is happy about the results. So we're ready for your questions.
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Questions and Answers
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Operator [1]
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(Operator Instructions) Our first question comes from Tyler Stafford with Stephens.
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Tyler Stafford, Stephens Inc., Research Division - MD [2]
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I want to start on the margin. It looks like the core loan yields were up 9 bps or so, extra recovery. I guess, last quarter, they were up 21 bps. I'm just wondering what you're seeing in terms of yield on the new production right now? And if there's any current details you can share with us on how much of the portfolio is fully variable at this point?
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Li Yu, Preferred Bank - Chairman, CEO and Company Secretary [3]
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On the yield production, when we compare it to the rest of the portfolio, is reasonable. But however, compared to the payoffs, the amount -- the loan payoff carries a higher rate than the new production rate in the amount of about roughly 18 basis points for the last quarter. However, this number changes from quarter-to-quarter because of the mix of the production. As far as the type of loan we're doing in -- even of quarter, for instance, generally speaking, C&I loans carry a lower yield than the CIE loans. So it is not necessarily happening. In the future -- we're going to see it happening this quarter. But last quarter, it shows a 18-basis-points difference.
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Edward J. Czajka, Preferred Bank - CFO and EVP [4]
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And the second part of the question, Tyler, in terms of floating rate loans, I believe, was the question. Of the $2.88 billion in total loans, $2.1 billion are completely at or off their floor. So those are completely floating or adjustable rate right now. There's $263 million of the floating rate still that's below its floor. However, 2/3 of that will come off at the next rate hike.
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Tyler Stafford, Stephens Inc., Research Division - MD [5]
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Okay, got it. And maybe staying within the margin, it looks like -- over on the deposit side, it looks like noninterest-bearing accounts were down at quarter-end. Is there anything that's driving that, that you can point to? And then, I guess, just stepping back, bigger picture, what are you guys seeing from an overall deposit-pricing standpoint? And what are the expectations for deposit beta going forward over the near term?
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Li Yu, Preferred Bank - Chairman, CEO and Company Secretary [6]
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We're trying to find out the reason why it is down but after working on that, cannot give you an answer. Probably the best guess is that as this interest rate start to go up, customers try to management -- manage their money a bit better. That's may be the only reason. Other than that, it's movement is pretty natural. For the third quarter, there's a lot of people who's paying their taxes, okay, before the quarter ends. So that may have something to do with that. But we're unable to find out any specific reason for that.
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Edward J. Czajka, Preferred Bank - CFO and EVP [7]
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And Tyler, as I look at the -- this is Ed again, as I look at the progression of demand deposits over the last 5 quarters, Q2 was a little bit of a spike in terms of what we saw in terms of our overall balances. So we're still on a good progression, if you take out Q2 and look at the quarters before that, we're still in a good growth trajectory as it relates to demand deposits. As it relates to deposit betas and deposit rates, we're still not seeing a lot of pressure yet on deposit pricing. We do see competitors moving in the marketplace, but we certainly think betas have backed off quite a bit from what our earlier expectations were.
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Tyler Stafford, Stephens Inc., Research Division - MD [8]
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So at least looking to the fourth quarter, something similar to what we saw in the third quarter would be a reasonable expectation?
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Edward J. Czajka, Preferred Bank - CFO and EVP [9]
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In terms of the margin or deposit size or...
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Tyler Stafford, Stephens Inc., Research Division - MD [10]
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I'm sorry, yes, in terms of the slight upward pressure on deposits just up, I guess, a couple of basis points or so.
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Li Yu, Preferred Bank - Chairman, CEO and Company Secretary [11]
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Well, that is a -- it could be that way. But again, all of us -- all of our competitors are rewriting their PCB loans at a higher rate, okay? We are no exception compared to the near growth, okay? But however, most of our deposit rate will still remain pretty competitive. And we're not moving much out of that, okay? Not at this point in time, but market will only tell because we don't dictate our competition.
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Tyler Stafford, Stephens Inc., Research Division - MD [12]
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And then just last one for me, just more housekeeping. Do you happen to have what the average security yield for this quarter?
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Edward J. Czajka, Preferred Bank - CFO and EVP [13]
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I knew you would pull something like that out, wouldn't you? 3.61%, Tyler.
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Operator [14]
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Our next question comes from Steve Moss with FBR.
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Stephen M. Moss, FBR Capital Markets & Co., Research Division - Former SVP [15]
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I wanted to just follow up in terms of -- on the deposit side, you mentioned a reduction in broker deposits. Wondering how much decline was this quarter? And where you stand on balance as at September 30?
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Edward J. Czajka, Preferred Bank - CFO and EVP [16]
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Oh gosh, I don't know I have that one, that specific number in front of me. I think we let $20 million run off of the brokered money...
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Li Yu, Preferred Bank - Chairman, CEO and Company Secretary [17]
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We also -- a lot of the national rate of the deposit shouldn't get out of it. We don't have much. But we just let it expire, it was [all renew] it. One of the things, Steve, we're sitting on, as I said earlier, $0.5 billion of cash. There is simply no urgency for us to do any deposits on a higher-rate area, okay? So it -- there has -- something has to do with management decision or managing the total cost, okay?
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Stephen M. Moss, FBR Capital Markets & Co., Research Division - Former SVP [18]
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Okay, that's helpful. And then in terms of the payoffs you saw this quarter, was that in commercial real estate or C&I? Just kind of curious there.
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Li Yu, Preferred Bank - Chairman, CEO and Company Secretary [19]
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Wellington, you want to answer that?
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Wellington Chen, Preferred Bank - President and COO [20]
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We had $42 million in C&I payoff, and we have $67 million in CRE.
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Li Yu, Preferred Bank - Chairman, CEO and Company Secretary [21]
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So I guess based on that, it's pretty even.
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Stephen M. Moss, FBR Capital Markets & Co., Research Division - Former SVP [22]
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Right. So I guess, the bottom line here was, production for the quarter must have -- was really good then relative to last quarter? Kind of implies better growth numbers...
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Li Yu, Preferred Bank - Chairman, CEO and Company Secretary [23]
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(inaudible) the profit seems similar, yes.
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Wellington Chen, Preferred Bank - President and COO [24]
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Certainly, yes. They're about the same.
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Edward J. Czajka, Preferred Bank - CFO and EVP [25]
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Last quarter, it was about...
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Wellington Chen, Preferred Bank - President and COO [26]
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And about same. Yes.
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Stephen M. Moss, FBR Capital Markets & Co., Research Division - Former SVP [27]
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Okay, that's helpful. And then in terms of expenses, just wondering about the outlook there for fourth quarter and beyond, how you're thinking about 2018?
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Li Yu, Preferred Bank - Chairman, CEO and Company Secretary [28]
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Well, first of all, that -- first of all, that fourth quarter, we will probably have a little bit more expenses because we have a new branch in San Francisco just approved. It will be in operation in -- target date is December 1, okay? The people operating the branch is already being hired in late third quarter, okay, but expect some of the costs will be there. And we're continuing adding personnel, which is our biggest cost. We're continuing adding more BSA personnel like everybody else is doing, okay? Compliance people, like everybody else doing. And we're continually upgrading our digital banking area, okay? So looking forward, there'll be some natural growth in expenses, okay? But as we've said, we will try to manage it, okay?
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Operator [29]
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Our next question comes from Aaron Deer with Sandler O'Neill.
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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [30]
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Just going back to the issue of paydowns, it sounds like the pipeline continues to be pretty robust. But just curious to know kind of based on what you've seen quarter-to-date on paydowns and what your anticipated maturities are, how do you see that affecting the growth here as we go into year-end?
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Li Yu, Preferred Bank - Chairman, CEO and Company Secretary [31]
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Well, I don't know about going into the year-end. A general trend seems to be -- from talking to many other people, seems that we should expect the paydown to be a little heavier than before. The reason is that -- I mean, it's a -- was a continued interest cost increases, upcoming rate rises (inaudible). It is a very natural to have many of your customers start to looking for new financing. And some of the fixed-rate financing and the higher rate start to make a sense for them, too, okay? So this is a natural event. But I guess that the question mainly is that whether we would be able to come up as more deals to look at it and more deals to do, okay? So all of this is -- it's really being closely monitored on a day-to-day basis. We cannot really tell you what exactly is happening in the fourth quarter. But that probably is the general feeling.
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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [32]
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Okay. And then on the -- just curious to know where the -- where your CRE concentration was at September 30 and how that's expected to change pro forma with the $50 million.
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Nick Pi, Preferred Bank - Chief Credit Officer and EVP [33]
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The concentration level is at 3 42 at this time as of September 30.
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Li Yu, Preferred Bank - Chairman, CEO and Company Secretary [34]
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Okay. It would be -- with the new capital rate, as of today, it's about $17 million, $18 million, okay? And it will be -- we think it's going to be substantial amount of $15 million will be raised. We expect the concentration level will be below the guideline by year-end, okay, if the whole amount is being raised, okay? And also, our profitability, which is continually increasing also helps, okay? So this is what our forecast is.
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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [35]
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Sure. Yes, now the internal capital generation has been terrific. The -- and then just a little housekeeping question for Ed on the -- what's your expectation for the full year 2018 -- well, the full year '17 as well as the anticipated tax rate for 2018 if we don't get any rate cuts?
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Edward J. Czajka, Preferred Bank - CFO and EVP [36]
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Well, let's see, on a year-to-date basis, I think we're right around 40% -- just under 40%. So I would expect us to maintain, kind of, a 40% to 41% rate for Q4. You can back into the math for the full year. But we also may get -- what also happens during the quarter -- each quarter, is if we have a lot of stock options exercised over that particular quarter, that will help to drive down the rate. So I would expect it to be where it's at right now or slightly below for Q4.
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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [37]
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Okay. That's kind of where I was getting at. Is there -- as you look out to next year, is there a specific quarter where you guys have a higher level of issuances or vesting that impacts it?
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Edward J. Czajka, Preferred Bank - CFO and EVP [38]
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The vesting doesn't necessarily impact it, Aaron, it's the -- just the exercises do. But as we go forward, we have fewer and fewer options outstanding, because our practice most recently has been to issue restricted shares as opposed to options. So the benefit we will get on a go-forward basis will add, if you will, as we go forward. And then, obviously, with respect to the change in corporate tax rate, I think you and I have talked about that. We'll have -- obviously, we'll get a big benefit out of that. But we will also have to charge to the DTA once that occurs as well.
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Aaron James Deer, Sandler O'Neill + Partners, L.P., Research Division - MD, Equity Research and Equity Research Analyst [39]
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Right. And that's still -- it -- I guess, the impact of that, with each passing quarter, declines some. Where does that stands today? Is it still like roughly -- well, I'll just let you answer the question, where does that stand for you?
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Edward J. Czajka, Preferred Bank - CFO and EVP [40]
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Well, I think it's still going to be pretty similar. The last time I calculated -- I have not looked at it recently, but the last time we looked at it, the charge to the DTA, more or less, offsets the reduction in the tax rate. And I think that was right about at the 20% to 22% tax rate, if we got down to there. And obviously, going forward, we got a big benefit going forward, but we'll have that charge once the due changes because (inaudible).
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Operator [41]
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(Operator Instructions) Our next question comes from Tim Coffey with FIG Partners.
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Timothy Norton Coffey, FIG Partners, LLC, Research Division - VP & Research Analyst [42]
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Mr. Yu, in addition to the San Francisco branch this next quarter, do you have any other planned branch openings in '18?
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Li Yu, Preferred Bank - Chairman, CEO and Company Secretary [43]
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Well, we are always on the lookout. Nothing in plans being right now. We're always looking for new possibility as far as branching out is concerned. Under consideration is obvious expansion in Orange County area and in the New York area that -- which is quite possible. And then, obviously, in the Greater Los Angeles area, there's always so many other spot we can go to. We don't have anything specific yet, but it is an ongoing exercise.
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Timothy Norton Coffey, FIG Partners, LLC, Research Division - VP & Research Analyst [44]
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Okay. And then I wonder if you have provided a little commentary on trends in the pipeline and follow the pipeline. Once the loan makes it into the pipeline, are you seeing any changes in whether or not that -- the percentage of those loans make it to the finish line?
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Li Yu, Preferred Bank - Chairman, CEO and Company Secretary [45]
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Well, obviously, not 100% of the loan will make it to the pipeline, come to the finish line. But in the past, generally speaking, with a high reliable rate in a 70% to 80% level. And I haven't seen that change because -- largely because our people are so experienced, they know exactly why management approve and they know exactly what customer will accept. So that has saved whole lot of management time. It was because the professionalism of our frontline staff.
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Timothy Norton Coffey, FIG Partners, LLC, Research Division - VP & Research Analyst [46]
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Of course. And so the competition then isn't doing things to disrupt that pipeline? In terms of relaxing the rate...
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Li Yu, Preferred Bank - Chairman, CEO and Company Secretary [47]
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Competition is always tough, but in our experience, once it gets in the pipeline, the reliability is pretty high.
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Operator [48]
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Our next question comes from Don Worthington with Raymond James.
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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [49]
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Just wondering if you have an update on the one piece of REO. I think you said last quarter that you're finally able to get a hold of it and market it. Just wondering if you have an update there.
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Li Yu, Preferred Bank - Chairman, CEO and Company Secretary [50]
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Well, believe it or not, a PSA has been done. It's about to open escrow very soon at a price that is substantially higher on the carrying value. But again, I wouldn't venture to say anything because in real estate only happens when it is sold off, okay? But we know the appraisal value of the piece of property have always been higher, much higher than of carrying that.
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Donald Allen Worthington, Raymond James & Associates, Inc., Research Division - Research Analyst [51]
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Okay. All right. And then are there any lending sectors or geographies where you're seeing any, kind of, weakening in credit conditions?
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Li Yu, Preferred Bank - Chairman, CEO and Company Secretary [52]
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Not in the 3 area we are operating in. Basically, in the Greater Los Angeles area and New York, and then San Francisco. So far it's, basically, mostly in the city. We didn't see any weaknesses in these 3 areas. In Los Angeles, basically, we're keeping substantially all but deal in the in-field area.
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Operator [53]
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This concludes our question-and-answer session. I'd like to turn the conference back over to management for any closing remarks.
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Li Yu, Preferred Bank - Chairman, CEO and Company Secretary [54]
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Thank you very much for your interest and for your support, okay? And once again, we will certainly work with the same attitude before in the first quarter and in the new year. Thank you.
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Operator [55]
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The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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