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Preferred Bank (PFBC) Q2 2019 Earnings Call Transcript

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Preferred Bank (NASDAQ: PFBC)
Q2 2019 Earnings Call
Jul 18, 2019 , 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Preferred Bank Second Quarter 2019 Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Tony Rossi from Financial Profiles, Investor Relations for Preferred Bank. Please go ahead.

Tony Rossi -- Investor Relations

Thanks, Chuck. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the second quarter ended June 30, 2019. 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 brief summary of the results and then we'll 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.

Li Yu -- Chairman and Chief Executive Officer

Thank you. Good morning. I'm pleased to report for the quarter, the Bank earned $20 million or $1.31 a share, which compares quite well with previous quarters. This quarter, we have had a extraordinarily large for us -- extraordinary large loan production. Loan increase over 21% for the quarter, although some of the increases is related to a very unusual heavy drawdown, many of our commercial line customers was balances -- with some of them was balances since, I mean, reversed, OK.

And also, it is also due to some other pattern fluctuation in payoff activities, but even without these two factors our loan origination is one of the best in recent periods. Deposits, however decreased $43 million. One of the reason is that we witnessed a very heavy drawdown of the bank balances by our customers in the last 10 days of June. Some of these balances has been since reviewed, OK. Another -- maybe perhaps another reason is that, during the quarter we will collectively -- collectively predict the yield movement -- the yield curve movement and then we made some rather early deposit rate adjustments, which in retrospect is probably ahead of competition, but the good news is, in the third quarter, there'll be a $314 million [Phonetic] of time certificates of deposits maturing. These deposits carry the same interest or slightly higher interest cost -- interest rate, average interest rate than what we have presently pay.

For the first quarter, maturing time certificates carries even larger interest cost than what we are currently paying. For the quarter, net interest margin come in at 4.07%, which is pretty much as internally expected. Efficiency ratio was 31.7% and we're very comfortable with our ROA of 1.89% and our ROE is 18.5%.

We recognize we have a very rate sensitive loan portfolio, but roughly, I want to point out roughly two-thirds of -- at a very large portion of our loans carry a interest rate flows. These flows will be serving as protective mechanism during a rate reduction environment, especially we are continually making new loans at the current market rate in this flow, and was all loans being continuously being paid off, which carries lower flow rate. This protection seems to be improving as time go on.

To reiterate, we have announced a $30 million capital stock buyback recently, which would definitely serve as -- will give us the opportunity to manage our capital more efficiently.

Thank you, and I'm ready for your questions.

Questions and Answers:

Operator

We will now being the question-and-answer session. [Operator Instructions] The first question comes from Aaron Deer of Sandler O'Neill & Partners. Please go ahead.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Hi, good morning, everyone.

Li Yu -- Chairman and Chief Executive Officer

Hi, how are you?

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Good, thank you. Li, the C&I growth this quarter really was very impressive. I was hoping and maybe you could give us a little bit more color behind the types of customers, and what it cause that growth and maybe the draws that you mentioned that we're more kind of temporary in nature, and then what that means for your expectations for overall loan growth. Do you [Phonetic] hear in the third and fourth quarters of the year.

Li Yu -- Chairman and Chief Executive Officer

Okay. Well, the C&I growth this quarter come from two different area. One is a new loans, we are making, which is also one of the best in our recent quarters. The new loans we're making during the quarter included some of the -- for using those couple of long time customers will usually have a small balances at zero loans, they suddenly is turning to us to make a [Indecipherable] in my loan product, OK. And also was -- with a several new customer in the fields of distributions and financial services, OK. So, and in a wide variety of small loans.

So the drawdowns coming from the -- I mean, the unusual drawdown comes -- do you think in quarter end, there seem to be that three different type of people. One type of people is that they have emergency needs such as a very good customer allow have suddenly have a acquisition, so they use their own cash and our credit line to close the deal for the quarter.

So, as also a number of customers, existing from the buying property was their own cash and all credit line, and also there are people as -- relatively small amount of people is in view of it, attention in the trade tariffs -- trade war is that building up the inventory a little bit before the tariffs become good, it become effect -- effective now.

So, if all these factors that's happening in the quarter end some of these drawdown has been repaid back. And as you -- as usual, it is almost impossible for us to predict the C&I projection in a period and fourth quarter. C&I is a continuous and relentless effort that you just walk on it. Sometime it all happen such as this quarter, sometime very little happens in one quarter, but overall production going to the third and fourth quarter. I have little visibility about first quarter, but third quarter looks like our normal production will be -- will be the same in another way.

So it's pretty much tracking second quarter's loan production. However, as second quarter included those quarter end drawdowns for special purpose since we have been repaid back and may negatively effect our third quarter in terms of what the loan growth sales concern. So, I don't know whether I made this clear on that, anybody -- and anybody who has a better ways of explaining it for me?

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Okay. Well, that's helpful. Looking at the other side of the balance sheet, just given that you had the strong loan growth in those kind of weak deposit flows and maybe you can give us some color. I know you guys had a fair bit of excess liquidity at March 31, to work with, and you've got that deployed brought up the loan-to-deposit ratio quite a bit. If you, now that you are -- where you are, if you were to have another strong quarter of growth as you had, what -- how do you feel about your positioning on the deposit side, and where rates are going to be able to fund that, and at what cost or do you think that with the rates coming back down now that you can come up with the funding that you need for -- to support future growth without having to really rachet up your deposit rates?

Li Yu -- Chairman and Chief Executive Officer

Well, the indication that seems to be the third quality deposit [Phonetic] situation. We would be able to build up some deposit. For instance, as of today, our deposit balances is about $100 million higher than in the quarter. Okay, so we have internally, making a whole lot of effort and try to continuously, that develop the deposits.

Our current deposit rate is very competitive with our competitors, OK. And second quarter seems to be better -- that's a little bit of a -- unusual for us, because it seems to be -- at the end of, as I said, at the last 10 days of June everybody's drawdown their balances. Many of them has draw it down because they a special due to be done, they close it, and since then, they either find a new resource to refinance or to do other things with it, OK. So that's part of the reason our deposits back up. So we will put our initiatives and try to review the deposits. We try to reestablish through our times, our excess liquidity situation. We've always been very comfortable to have the deposit for us and the loan afterwards. So I guess it's a -- undefinite answer, but its a definite effect.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Okay, terrific. Thanks very much for taking my questions. Appreciate it.

Operator

The next question comes from Gary Tenner of D.A. Davidson. Please go ahead.

Gary Tenner -- D.A. Davidson & Co -- Analyst

Thank you. Good morning. I was hoping you could tell us what the loan origination yield was for the second quarter.

Li Yu -- Chairman and Chief Executive Officer

Well, OK. Let me -- let me, I have it. We have it. Hang on. We have few loan origination yields above, in the 5.9% average, but a lot of time depending on their usage that, the usage of that which changed the portfolio of things.

Gary Tenner -- D.A. Davidson & Co -- Analyst

Okay. And then could you give us any color on kind of the sequential increase in service charges and other income? Is there anything in there that was unusual or how should we be thinking about that for the back half of the year?

Li Yu -- Chairman and Chief Executive Officer

Well -- yeah, Gary, in service charges, there was about $50,000 of what we would term as somewhat non-recurring item with respect to LC fee income and other income, that looks pretty much standard.

Gary Tenner -- D.A. Davidson & Co -- Analyst

Okay. And then, I think you addressed the spike in loan growth very, very well. I'm just wondering as we get into the back half of the year and what you generally sheer a little bit of benefit on the trade finance side. Do you have any sense from your customers? How things may play out there in the back half of the year compared to previous years given the [Indecipherable]?

Li Yu -- Chairman and Chief Executive Officer

Most of our customers, they're not sizable enough to really be able to tell it in -- was any kind of inside information and many of them, we just optimistically hoping that it will get resolved soon because if not, they have to readjust their operations quite significantly, but we don't care and we just like -- so we just, and in fact, we are looking at the Wall Street information for leadership or these kind of information. So, we just tried to stay alert to whatever is coming.

Gary Tenner -- D.A. Davidson & Co -- Analyst

Okay, thank you for the questions.

Operator

The next question comes from Tyler Stafford of Stephens. Please go ahead.

Andrew Terrell -- Stephens Inc -- Analyst

Hey, this is actually Andrew Terrell on for Tyler this morning. Good morning, guys.

Li Yu -- Chairman and Chief Executive Officer

Hi, Andrew.

Andrew Terrell -- Stephens Inc -- Analyst

Hey, maybe just to start on the NIM, just from a high level, how do you guys see the NIM trending throughout the year and then kind of end of 2020, if we do get a couple of rate cuts from the Fed?

Li Yu -- Chairman and Chief Executive Officer

Well, obviously in the rate cuts, everyone of our [Indecipherable] revenues reducing, and with our asset sensitive, our loan -- rate sensitive portfolio are floating, our rate will be reducing, but if you have a couple rate cuts, I expect the first cut will affect more than second cuts, because a flow came into play. And as our TCV will continually maturing and being repriced at a lower cost to pay. Currently, their cost is already going to be repriced at the lower level, but with rate cuts I expect everyone of us will pay less for TCVs, but the benefit was still be increasing, so somewhere along the line, there will be clause that it would not hurt us anymore. So...

Andrew Terrell -- Stephens Inc -- Analyst

Great, thanks for that. Maybe, just a little bit more on the flows -- on the loans you're referencing. Can you give any kind of color around maybe where the average flow rates are?

Li Yu -- Chairman and Chief Executive Officer

Average flow rate is tough, it made through the -- all throughout the past five, six and seven years, they are loans that was a very long seniorities, that carry a real low rates, they are -- there are rates that they are -- loans being made recently is carried, the recent flow rate, but the current flow rate situation, as we said, and a good portion of our loans, maybe 15% of our loans carry a flow rate at the current effective rate. So the rate cuts would not be affecting us, but was each cut as they going on, there'll be more rates, more loans being now affected.

Andrew Terrell -- Stephens Inc -- Analyst

All right, that's good color. Thank you. Maybe last one from me just on -- now that we have the share repurchase plan approved. Just wanted to get a thoughts on how you guys are thinking about utilizing repurchases moving forward?

Li Yu -- Chairman and Chief Executive Officer

Do you want to answer the question?

Edward J. Czajka -- Executive Vice President and Chief Financial Officer

Yeah, well, obviously we announced it. We have to wait until the blackout period is over with, but our goal is to start with the repurchase and then see what happens with respect to the share price. And with respect to interest rates as well, and then we will be able to obviously adjust it as we need to going forward. But at this point, we're planning on a 10b5-1 plan to go ahead and start systematically, repurchasing small amounts of shares.

Li Yu -- Chairman and Chief Executive Officer

[Indecipherable] everyday, yeah.

Andrew Terrell -- Stephens Inc -- Analyst

All right, that's it from me. Thanks for taking my questions.

Operator

(Operator Instructions) Our next question comes from Don Worthington of Raymond James. Please go ahead.

Don Worthington -- Raymond James & Associates, Inc -- Analyst

Thank you. Good morning, everyone.

Li Yu -- Chairman and Chief Executive Officer

Hi, Don.

Don Worthington -- Raymond James & Associates, Inc -- Analyst

I wanted to get back to the deposit flows. Did you have any customers move deposits from transaction accounts in the CDs to get higher rates?

Li Yu -- Chairman and Chief Executive Officer

There is actually a small movement that I'll -- especially the non-business customers, OK. They moving from the DDAs or excess DDAs or money market account, which carry a lower rate to TCVs, OK. In fact, every time there is a rate increasing environment, we all expect this thing to happen, and in fact our regulators even told us a way back, what the rate is increasing, so you have to -- have you guys do your interest rate risk on yield manage it and much of your deposit will be turn into the higher rates deposits, which one has been happening. But as we continue to, what we developing -- as we continuously developing is our business accounts. So, our rate of increases, our movement of the segment is kind of a moderate.

Don Worthington -- Raymond James & Associates, Inc -- Analyst

Okay. And then, in terms of lending sectors. Are there any that you are becoming more cautious about the current environment?

Li Yu -- Chairman and Chief Executive Officer

We have internally, obviously have made the review of all our loans, especially with heavy trade tariff related items. And from time-to-time that we are reviewing our real estate portfolio based on the various categories we have, but one of the things that most of our real estate, let's say, 80% of real estates in the Los Angeles area, and most of the real estate in the interior [Phonetic] area and heavily is Downtown West, and based on the many of the current reports from many of your colleagues affirms they are reporting that, they all check where the real estate industry is, in San Francisco, Los Angeles deal very, very hot. We have made a review on the New York real estate regarding their new rent control initiative. We have very little exposures there. I'm not -- I'm taking what's out of your mouth, OK. Nick, could you put some color on that?

Nick Pi -- EVP & Chief Credit Officer

Yes, New York multifamily segment is not going to substantial our portfolio at this time. There also, just like, Mr. Yu mentioned, the tariff effective loans is quite minimal at our Bank, [Indecipherable] our business models and we have been closely monitoring all those loans, and we didn't really notice any kind of an active -- severe negative impact to our borrowers. So far, hopefully, so far.

Don Worthington -- Raymond James & Associates, Inc -- Analyst

Okay, great. Thank you. And then one last question, did you purchase any loans this quarter, were they all originations?

Li Yu -- Chairman and Chief Executive Officer

No, in fact, we participate out several loans.

Don Worthington -- Raymond James & Associates, Inc -- Analyst

Okay, great. Thank you.

Operator

Our next question comes from Aaron Deer of Sandler O'Neill & Partners. Please go ahead.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Hi guys, just a couple of quick housekeeping questions on expenses. And I was surprised to see the occupancy costs drift lower given that you guys have the new headquarter space, is this a good run rate for that line item?

Li Yu -- Chairman and Chief Executive Officer

It's going to be a little bit higher than what you see Aaron because we implemented ASC 842, the lease accounting standard and [Speech Overlap] on costs a little bit in the near term, but that will be coming back up as we go forward. So, I would look for that to tick back up. I know we're at 1.27 million [Phonetic]. I would look for some probably north of 1.3 million [Phonetic].

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Okay. And then, I'm guessing you guys are through the day two expenses on your systems conversion. Is this now a good run rate for the professional services line or is that may be run in a little low, this past quarter as well?

Li Yu -- Chairman and Chief Executive Officer

That's a good question, Aaron. For the most part the day two, day three items with respect to the IT conversion are already baked in, but what we saw this quarter was legal fees were extraordinarily low as well as we received a legal fee recovery from an old item. So it was quite low this quarter, you're absolutely right. I would not look for it to be this low in future quarters.

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Okay, terrific. Thanks for taking my questions.

Operator

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

Li Yu -- Chairman and Chief Executive Officer

Well, thank you so much. We know, well we just hope that we continue to operate with our current matrix. It seems to be that it's working right now. And then that will obviously would be very keenly observing the rate environment now. Thank you.

Operator

[Operator Closing Remarks]

Duration: 26 minutes

Call participants:

Tony Rossi -- Investor Relations

Li Yu -- Chairman and Chief Executive Officer

Edward J. Czajka -- Executive Vice President and Chief Financial Officer

Nick Pi -- EVP & Chief Credit Officer

Aaron Deer -- Sandler O'Neill & Partners -- Analyst

Gary Tenner -- D.A. Davidson & Co -- Analyst

Andrew Terrell -- Stephens Inc -- Analyst

Don Worthington -- Raymond James & Associates, Inc -- Analyst

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