Preferred Bank (PFBC) Earnings Call Transcript & Summary

Good afternoon and welcome to the Preferred Bank Fourth Quarter 2019 Earnings Conference Call and Webcast. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Tony Rossi of Financial Profiles. Please go ahead.

Thanks, Gary. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the fourth quarter ended December 31, 2019. 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 like to turn the call over to Mr. Li Yu. Please go ahead.

Good morning. For the quarter ended December 31, 2019, our bank has earned a net income of $1.31 a share. This is a slight decrease of $0.01 from the previous quarter. But -- we would have been able to report the same amount, but our effective tax rate has increased to 30.5%. For the year, we have earned net income of $78.4 million or $5.16, which compares reasonably well with the previous year. Fourth quarter loan growth was $53 million, a little less than 6% annualized. A number of the loan was pushed to January because the holiday season just find the -- closing on time is difficult. For the year, our total loan growth is $392 million or little less than 12%. First quarter deposits growth -- I mean fourth quarter deposit growth was $114 million or on an annualized basis of 12%. For the year, our total deposits has grown $344 million or 9.4%. As we are all aware of, there has been 3 rate cuts right in between July and October. All these rate cuts that financially in effect are fully reflected cumulatively in the fourth quarter case. Our interest margin therefore declined to 3.67%. For the year, our net interest margin was 3.92%, a 16 basis points reduction from previous year. The interest rate outlook seems to be stable. And if that's the case, our net interest margin will stabilize in early 2020 and gradually improve thereafter. I'm happy also to report our cost control is in effect. We basically operate pretty much the same -- at the same cost of previous quarter of previous year. And our efficiency ratio is 32.6% for the fourth quarter and 33.3% for the year. And we believe such effort can be continued in the ensuing year. Thank you so much for your -- joining the conference phone call. I'm ready to answer your questions.

[Operator Instructions] Our first question is from Steve Moss with B. Riley FBR.

I just wanted to start on loan growth there. I heard Mr. Yu said it was pushed out to January. Just wondering, could you give some -- quantify how much growth you're looking for in the first quarter?

Probably, I don't know how much the first quarter is. It would -- loan production will be -- it would slip into the first quarter and the -- every quarter end, there is some slippage into the next quarter. But the extraordinary, in my estimation, probably in the $40 million to $50 million range.

Okay. That's helpful. And then just in terms of the overall loan pipeline, I -- judging by your comments, still it sounds like it's pretty strong, but paydowns are challenging...

We are able to produce whole lot of loans during the year. We are -- we have a great origination effort during the year. But past year, we've been experiencing very, very heavy payoff activities, okay? So we actually originated a little bit over $1 billion on new loans outstanding, but the payoff is almost $700 million. So from that point on, we have not see the short of the loan activities. But the coming year, with the stable interest rate environment, if it has continued that way, we hope to be able to repeat the same effort, if not improving on that. But it's hard to tell the amount.

Okay. That's helpful. And then on expenses, just with -- I hear you on the cost controls. But this quarter seemed exceptionally low and maybe a little bit kind of onetime nature of professional fees and a few things coming in. Just wondering what you're thinking for the first quarter of 2020 or if we're at a pretty good run rate here with this quarter's number.

Ed, do you have some feeling about that?

Yes. So as you know, we've got some benefit from the FDIC insurance premium in Q4. I think I pegged that at about $450,000. So really, you add that back and you get back close to really what the run rate should be on a go-forward basis. In terms of professional services, there is a number of things in there, Steve. Obviously, legal fees and then consultant and as well as IT costs are in there as well. And as we have been on the kind of the back end of our major core conversion from the middle of 2018, we've been continuing to work and we've been engaging people to continue to work on our systems. So we're starting to see that come to a slowdown now in terms of the overall investment and effort on the heels of that conversion. So part of that is that reason. And then legal fees are down this year as well because we did not have other credit issues that we had in the previous year.

Right. Okay, that makes sense. And then my last question, Ed. On CECL, what should we expect for the impact in day 1 and so forth?

Well, at this point, it's tentative. But we have a range, and that range would put our ALLL-to-total loans probably about 15 to 20 basis points higher than where it is right now. So -- but obviously, that is subject to change. As you know, that's kind of a year-end look. We don't implement CECL, obviously, until 3/31. So that's subject to change, although that's kind of where we think it's going to fall, kind of in that neighborhood.

The next question is from Aaron Deer with Piper Sandler.

Ed, just curious, the -- is there any remaining FDIC credit to be realized this year? Or was that fully exhausted in the fourth quarter?

I think we have a little bit left, Aaron, not a material amount.

Okay. And then it's -- I think Mr. Yu and Eddie both kind of commented that the margin is likely to stabilize here early in the year then maybe see some expansion as we move through the year. Could you give us some specifics in terms of what's -- what gives you that confidence? What's driving that in terms of -- what volume of CDs are going to be repricing? And what the average rate are -- is on those that -- relative to what you guys are paying today? And then what is lingering in terms of -- on the loan side that could still see some repricing yet?

We -- first of all, we have about between $100 million to $150 million of TCD to be repriced every month. And general differences, Ed, correct me if I'm wrong, it's roughly $0.70 give and take about...

It was 87 basis points.

You know what, that's -- maybe -- roughly $0.70 based on what we figured what -- our coupon rate we're paying right now, okay? So this, as we go on, you can see that will be -- have a continuing effect on reducing our interest cost. And as natural for any and every -- all bank, it seems to be the loan get paid off is always carrying a slightly higher interest rate than the new loans being made. It's very hard to estimate or predetermine. We don't even know which one is going to be paying off in most cases, okay, in the first quarter. So hopefully, the net effect of this kind of situation will be leading to a stabilized, if not improving, interest rate in the year.

So -- and could we see that dynamic, we see that inflection happen here right away here in the first quarter? Is it more likely a second quarter event before we see inflection really start to develop?

Well, yes, the continuing -- TCD cost decreases is continuing from day 1, okay? But we don't know -- the thing that we don't know is what loan gets paid off, okay? What coupon rate they carry as compared to new loan will be made is the issue.

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

I wanted to just clarify the question on interest -- or excuse me, on noninterest expense. Ed, you mentioned that kind of adding back the FDIC expense will get you to a run rate. But as we think about the first quarter, there is still the seasonal increase in personnel expense. Is that correct?

Yes, that is correct. We'll have the elevated...

Payroll taxes.

Payroll taxes related to the annual bonus.

Yes, they are right. You're very correct.

Okay. And then the commentary just a moment ago on the CD repricing kind of the 70 basis point rev repricing gap outlook. Does that continue -- is that repricing gap what you expect for the majority of the year? Or is that more through the first, call it, a couple of quarters before the kind of gap lessens in the back half of the year?

Well, I will give you a generality and ask for my colleagues to also add their feeling about it. You see that one of the things we subject to is competition, okay? We cannot be -- you need to add or, say, decide what we want to pay. But as of today, we're paying this particular CD rate and depend on how the competition reacts, okay? And if competition is doing the same thing as we do, we can see this kind of saving continuing for the year until interest rate become -- changing until the 12 months period is as all repriced, in general, okay? So this is that. But on the other situation, for instance, okay, a couple of major banks still paying 1.75% on money market, okay? So we have to spend down as -- or try to retain them even at our current rate. So competition really is the main issue. But our coupon right now is reflecting a continuous cost reduction. Anything to add?

No, I think that says it all. I think over time, Gary, obviously, as you would imagine, that 70 basis point differential gets smaller and smaller as we get closer to CDs that were originated in a lower rate environment. So I think the first 2 quarters, I think you'll see the most benefit and then it will start to wane in Q3.

Okay. That's perfect. And then finally, Ed, if you have available -- if you could give us the cost of total deposits on average for the fourth quarter and the third quarter.

Total deposit average?

Yes, cost.

Average cost. Yes, Q3 total deposit cost, $157 million. Q4, it declined to $140 million.

[Operator Instructions] The next question is from Tim Coffey with Janney.

Ed, a question for you and perhaps for you, too, Mr. Yu. The trends in your demand deposits have been exceptionally strong, especially in the last 2 quarters. What are you seeing in -- that's allowing you to grow those deposits?

Oh, boy. Actually, maybe, if you really want to think about it, I think last quarter, we've been lucky there. And maybe in some cases that we see at the year, and some customer always are bringing some cash to their balance sheet, whether it's by collection from the receivable, whatever are ready to pay the expenses, bonuses, all those other things in the early part of the year. But in general that -- the bank has take a -- priority is grow demand deposits even ranking ahead of growing the loans. We -- it's very hard for us to -- being our size and being -- we're a one-off type of bank, it's very hard for us to tell you, right now, what we think it would be, okay? I mean, Wellington, you have a crystal ball. You want to add on that?

Tim, I don't have a crystal ball. However, I think that it's also -- add on to what Mr. Yu mentioned is our continue -- pursue of focusing on the cheap deposit, the DDA in terms of the loans that we originate and commanding the operating accounts and expanding our C&I business as well. And that -- no, that also drives up the DDA.

Okay. And then just kind of -- do you have any idea of how much of the growth this last quarter is seasonal and that it could come out in the first quarter?

Actually, not much. We look at our first quarter deposits right now. As of today, we have actually -- have increased from last quarter end, okay? And not much change in the demand deposit side. So, so far has been stable. But I don't know, I guess, by April 30...

We'll have tax season.

Yes, by April 30, things all change.

Understood. And then, Ed, what's a good tax rate to use?

For 2020, I would use just over 30%, 30-point, sub-5%.

This concludes our question-and-answer session. I would like to turn the conference back over to the management team for any closing remarks.

Thank you that -- we thank you for your interest in us. And obviously, we considered 2019 to be a reasonably good year for us, and we certainly will continue our effort. Thank you.

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