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Preferred Bank  (NASDAQ:PFBC)
Q4 2018 Earnings Conference Call
Jan. 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's Fourth Quarter 2018 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.

At this time, I would like to turn the conference over to Tony Rossi of Financial Profiles. Please go ahead, sir.

Tony Rossi -- Investor Relations

Thanks, Denise. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the fourth quarter ended December 31, 2018.

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 will open up the call to your questions.

During the course of this conference call, statements 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 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. For the fourth quarter, Preferred Bank earned net income of $18.7 million or $1.22 a share. For the whole year our total earning was $4.64 per share. Both of these number compare very favorably with prior years. And on the pre-tax basis, that our net income -- pre-tax net income was 43% better than the previous year.

The fourth quarter earnings was affected by a rather large and unusual loan loss provision of $5.55 million. The reason is that we have decided to take back the New York multifamily loan properties through the bankruptcy proceedings and then turning into a OREO. The appraisal report coming back at a value much lower than the previous valuation. Therefore, we made a rather large writedown to the loan. The appraisal report did come in with two different values: one of them is as a condominium, which is higher; one of them is as a apartment, which is lower. We took the lower valuation and make the writedown. Excluding these loans, our total loan portfolio, classified assets, was less than $8 million, very little amount.

During the quarter our loan growth was only $58 million or 1.77%, which is lower than our previous quarters. And during the quarter, we have experienced very, very heavy pay-off activities, which doubled the amount of previous quarters. So even with a very vibrant origination, the loan only grew $58 million.

For the quarter, deposits grew more comfortably at $121 million or 3.44% on the linked-quarter basis. The Bank now has over $600 million of cash on hand, which should be -- provide lot of flexibility for the future growth.

During the quarter, the net interest margin improved, efficiency ratio improved and also the return on assets improved. At the end of the year, during the fourth quarter, myself, the entire team, our customers and many friends in the business all concerned with the stock market melt-down, the various economic forecast, the shape of the yield curve, the trade tension, et cetera, et cetera, et cetera, as we have build up a profitable operation through a reasonable net interest margin, a good efficiency ratio and the very asset sensitive loan portfolio. And if the economy didn't turn solid 2018, if the trade tensions subsides, if our government does not close down for X period of time, extended period of time and if the yield curve is somewhat rational and reasonable, we are prepared to take all the advantage and the opportunity that will be given to us.

Thank you very much. I'm ready for your questions.

Questions and Answers:

Operator

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) And your first questions will be from Aaron Deer of Sandler O'Neill. Please go ahead.

Aaron Deer -- Sandler O'Neill -- Analyst

Hello, Mr. Yu; and good morning, everyone.

Li Yu -- Chairman and Chief Executive Officer

Hi.

Aaron Deer -- Sandler O'Neill -- Analyst

I guess, I'd like to start with the New York credits. Maybe if you could, just give us a little bit more color on how things have transpired with those credits and since their inception, in particular, the -- just maybe talk about your confidence in the validity of the original appraisals. And then kind of what's happened within the marketplace or maybe with the properties themselves that's caused the values to erode such that original 65% LTV ratio on those has been absorbed?

Li Yu -- Chairman and Chief Executive Officer

We have no way of commenting on the original validity of the appraisal. And as of today, that we have not find much holes of some of the assumption they have used at this point of time, and even so that will be water under the bridge, because the appraisal does go on for several rounds, and the value has been in the reasonable trend until the foreclosure and until the take-back through the bankruptcy property. Until in the fourth quarter New York reported a 5.8%, Manhattan reported 5.8% downturn in real estate, OK, that was well documented in all the papers, OK.

So, and also the trend is that those of us in business on those and when the Bank is started to take over the property, the valuation how suddenly become very conservative by the appraiser. So we have two valuations: we have a condo valuation, $44 million; then we have apartment valuation, $40.6 million. We decided to take the apartment valuation and mark it down 9% to carry on the book of the loan, which will be transfered to OREO, in fact it will be today and tomorrow it will be transferred to OREO in the whole thing. Now, if history is any guidance to us at all, and we hope this time is not exception, we have always been able to dispose off our OREO at a profit.

Aaron Deer -- Sandler O'Neill -- Analyst

Okay. That's great. And I appreciate that additional color. Any sense in terms of the time -- I know when we chatted back in December, there -- you had some interested buyers on at least one of those properties. Can you give us an update on any trends there?

Tony Rossi -- Investor Relations

Well, obviously, deal did not go through, but the deal is still going on, OK. The buyer -- believe it or not that anytime the Bank wants to sell something, the buyer gets to be very, very careful and choosy, OK. So I mean, that -- we're still -- obviously, we're still hopeful, because these are very desirable property. And when stabilized, based on what we have from the mortgage information, even the appraisal, when stabilized, still produce reasonable net interest -- net operating income. So it is not so-called the rundown type of property and so on. So at the other end is we tend to be a little bit choosy too. We just don't want to give away the stock.

Aaron Deer -- Sandler O'Neill -- Analyst

Sure. I understand. And then in your opening commentary you kind of laid out some different macroeconomic concerns and if all these things go right, you'll be looking to take advantage of opportunities in the marketplace. And in the press release, you also noted, I think, you said the term extreme caution as you look out to the year. Is it kind of -- I guess bridge of those two ideas of being cautioned, but seeing opportunities, what does that mean in your mind in terms of what kind of growth we might anticipate for 2019?

Tony Rossi -- Investor Relations

Okay. We -- please understand, number one thing is that we are managing other people's money, mostly our depositors and our shareholders. So, it is constantly, you know, I have three management team people sitting over here. And they, sort of, like every week, in fact, tell me that we need to be more careful, OK. And then you have customer, you have shareholders, coming in, says, well, the credit cycle is right on the corner, OK, now you guys have to be careful. But with all this market spooking and even you know with the recent economic, I mean, forecast and what was a robust economy growing three-point-some-percent in 2018, OK, it's coming down to less than 2% in 2019 and so on. And various people come up with various forecast. Even among the six firm that's covering us, there are some positive, there are some negative regarding -- with the credit cycle here.

Now, we cannot afford to be erred, OK. So, all we can do is be extremely cautious. And I guess, being extremely conscious has two meanings. The one is build yourself stronger. I think hopefully we did that. We have a good profitability, we have a good capital, we have good earning margin, we have good efficiency. So we are ready to face the storm, if there is a storm at all, OK. So it is not, obviously, we will move forward with the full speed ahead.

Aaron Deer -- Sandler O'Neill -- Analyst

Okay. Good stuff. And then, just one for Ed, if I may. Ed, can you give me a sense of what kind of maturities you have in the CD buckets over the next couple of quarters and kind of where those rates are relative to current deposit rates and what that might mean for your margin, as you look out?

Edward Czajka -- Chief Financial Officer

Well, the average -- weighted average remaining life, I think, on the CD portfolio is little over six months, Aaron. So you kind of parse that through. But what we've been seeing on the interest expense side, not only on CDs, but also on money market and so forth is, we're seeing obviously an upward trend, but what we're also seeing, I think it's important to point out, is that we are seeing a little bit of a leveling off in terms of the overall deposit market rates.

Now, as it pertains to our own CD portfolio, that will continue to go to rise, because we will have CDs maturing as you point out at lower rates and coming back on at higher rates. But we still also -- we really felt the full effect of the rate hike in the end of September, we felt that in Q4 and even though in the headwinds of higher deposit costs, you saw the margin expand by 9 basis points, which actually took us little bit by surprise as well. We are very pleased with that.

Now, we're going to have the full effect of the December rate hike in Q1 of 2019. So, with the leveling off of the market rates on deposits and with the better loan yield and cash yield, as Mr. Yu pointed out, we have $600 million in cash, that moves us well. And so, I would expect that the margin should hold probably where it's at right now into Q1.

Aaron Deer -- Sandler O'Neill -- Analyst

Okay. That's great. Thanks for taking my questions. I appreciate it.

Operator

And the next question will be from Stephen Moss of B. Riley FBR. Please go ahead.

Stephen Moss -- B. Riley FBR -- Analyst

Good morning. I guess just following up on being more cautious or conservative in 2019, should we think about loan growth perhaps slowing down to, say, the high-single digits? Or do you still see our loan pipeline that's strong where it can be, in the double-digits?

Li Yu -- Chairman and Chief Executive Officer

Well, I think, our origination effort is about the same. We have not cutting down our origination. In fact, we're going to continue to expand our loan production staff, OK. But I think what we don't know about is the payoff activities. Like the first quarter, the payoff is so high. And if -- let's say, if the yield curve become inverse, OK, which I think is your firm is predicting the credit cycle is on the corner, right, OK. If the loan yield is going to inverse and if credit corner is getting close and we've start to believe that, I think every one of us in our industry will be slowing down on the origination effort. But right now we don't see anybody is doing that and we're not either.

Stephen Moss -- B. Riley FBR -- Analyst

Got you. Okay. And then I guess my second question, following up on the OREO (ph) property here. Should we think about that there'll be a rehab process, maybe even have it rent stabilized before the property's market or is it on the market?

Li Yu -- Chairman and Chief Executive Officer

I'd like to think that for sure that was produced by the bankruptcy court, OK, and show the property very well, OK. And the most recent -- the things that we got from the bankruptcy trustee is that there is no deferred maintenance on the situation. So it's just -- it's not being leased out. It's not being fully leased out, we need to stabilize it. There may be some very minor sort of pickup item, cleanup items, OK. Nick, you want to add more color to that?

Nick Pi -- Executive Vice President and Chief Credit Officer

Hi, Stephen. How are you? This is Nick speaking. I was there during the bankruptcy disposition time. And I made the tour of both property entirely. I didn't notice any sort of maintenance behind. And some of the units, definitely has been occupied and some of the units was vacant at that time and there was a doorman on both properties, it's really good profit though.

Stephen Moss -- B. Riley FBR -- Analyst

Okay. That's helpful. And I guess one last question on the expense front. Wondering how we think about total expenses going forward, they were very well controlled this quarter and if you have any planned investments in 2019?

Edward Czajka -- Chief Financial Officer

Hey, Steve. This is Ed. So yes, we were very pleased about the expense control in Q4 coming in at $13.7 million. I think I was probably guiding a little bit higher than that, because we had a few unknowns, but a few things to discuss. First off, going into 2019, we're going to be moving our headquarters into larger space. So our rental expense -- occupancy expense is going to rise a bit, as well our equipment expense, because we're making some investments up there as well in the new headquarters space. Aside from that, on the expense side, we still have a few IT initiatives, what we call day two initiatives from the system conversion that we did this year. Those are going to be taking place in the first and second quarters.

So we'll see somewhat elevated professional services expense as we've seen in the last few quarters, we are at $1.45 million in Q4, which is little bit high, because we still have things going on there and we had legal fees relating to some of these items we've talked about, especially the New York loan. So that helped to -- actually non-interest expense would have even been a little better. So going forward, you know I would guide somewhere in the neighborhood of $14 million on a run rate on a quarterly basis, maybe a little bit lower.

Stephen Moss -- B. Riley FBR -- Analyst

All right. Thank you very much.

Edward Czajka -- Chief Financial Officer

Thanks.

Operator

And the next question will be from Tim Coffey of FIG Partners. Please go ahead.

Tim Coffey -- FIG Partners -- Analyst

Great. Thank you. Good morning, everybody. Looking at the loan yields in the quarter, how much of that quarter-over-quarter increase was from prepayment penalties or prepayment fees?

Li Yu -- Chairman and Chief Executive Officer

We have very little prepayment income. Basically, all our loans are floating rate loans, which does not include prepayment fees, OK. So I will say, it's, to the point, negligible.

Tim Coffey -- FIG Partners -- Analyst

Okay. That's a great pickup for millennials then. Was the runoff, or -- the runoff in the loan portfolio that you did see, was that just tied primarily to rate hikes or was there -- were your competitors being more competitive during the quarter?

Li Yu -- Chairman and Chief Executive Officer

Both. I guess, the rate hike has -- I don't know how to put it, maybe rate hike has caused to be competitive even more aggressive, but there are more people willing to make lower rate loan these days than ever before, OK. Would you say, Wellington, that's --

Wellington Chen -- President and Chief Operating Officer

That's very correct. There are banks out there still willing to give a very low fixed-rate loan out there, that doesn't make sense.

Tim Coffey -- FIG Partners -- Analyst

And when we talk -- just kind of follow-up on that. When we talk about the threat of more prepays going into the first quarter, that's kind of what you're talking about, that's the main concern as the competitive environment?

Li Yu -- Chairman and Chief Executive Officer

The competitive environment is the main situation, but also we have to watch the economy and also the entire economy and all the activities going around. For instance, how many people is going to make the extension plan given the trade tension that was there. So the loan demand certainly be affected by these kind of things. And also how many things that if government's going to shutdown for another period of time, TSA will be closed down, nobody travels. I mean, I'm just being extreme, OK, I mean, all these things will affect in the first quarter. If we started to put quarter-by-quarter, it is kind of limiting ourselves; if we enlarge it to year-by-year, we think, in the year, whatever -- first quarter is lower will be picked up, or first quarter is higher will be moderated by over a year basis. Quarter, it's very hard to do it and very hard to just say exactly how much we think it will be.

Tim Coffey -- FIG Partners -- Analyst

Okay. And since we're just on that subject of the government shutdown, is there any product our government program that Preferred Bank uses that's some -- that's currently not available because of the government shutdown that could potentially limit loan growth?

Li Yu -- Chairman and Chief Executive Officer

Okay. I'm just checking. Ed, do you --

Edward Czajka -- Chief Financial Officer

None that I'm aware of. We don't have any SBA. So (multiple speakers) for USDA.

Tim Coffey -- FIG Partners -- Analyst

Okay. Just checking. And then when we look at the additional cost of bringing in $1 of deposits, last couple of quarters, it's been somewhere around 8 to 17 basis points. Is it kind of in that range, or going so far into the -- what you've seen so far, or is it, as you mentioned, starting to soften a little bit?

Li Yu -- Chairman and Chief Executive Officer

Ed, you want to answer that -- I guess, you want to clarify the question.

Edward Czajka -- Chief Financial Officer

Yeah, what was it, Tim? I'm sorry.

Tim Coffey -- FIG Partners -- Analyst

Sure. Yes. So as we look toward adding the next dollar in deposits, is the incremental cost of that above what we've seen in the past couple of quarters say that 8 basis points to 17 basis points range?

Edward Czajka -- Chief Financial Officer

Yeah. I think -- yeah, the incremental cost obviously is up, but again, it really depends, Tim. We're in a situation now where we're still trying to grow demand deposits and obviously those at zero interest rate, obviously, brings the cost down. But certainly, on the CD side and the money market side, yeah, the cost to acquire has gone up significantly. But I think as we just turn to our own portfolio, it's going to be kind of a slow process. And then, I think, at some point that will start to reverse itself.

Tim Coffey -- FIG Partners -- Analyst

Okay. Very good. Those were all my questions. Thank you.

Li Yu -- Chairman and Chief Executive Officer

Thank you.

Operator

(Operator Instructions) The next question will be from Don Worthington of Raymond James. Please go ahead.

Don Worthington -- Raymond James -- Analyst

Thank you. Good morning, everyone.

Li Yu -- Chairman and Chief Executive Officer

Hi.

Don Worthington -- Raymond James -- Analyst

Getting back to the New York properties. When you first disclosed the issue with the one credit relationship, there were couple of single-family properties in there too. What's the status of those?

Li Yu -- Chairman and Chief Executive Officer

Thank you. Let me just try to explain, Nick will add on to it, OK. The single-family, one property is in the Hamptons, OK. The most recent valuation still stands around $5 million, we were owed $3 million, OK. The other property is in the Westchester County, OK. That was about -- the valuation is a $4 million security, we're owed $2.6 million. Am I correct in that, Nick?

Nick Pi -- Executive Vice President and Chief Credit Officer

The most updated appraisal for that one has been dropped a little bit.

Li Yu -- Chairman and Chief Executive Officer

Okay. Go ahead.

Nick Pi -- Executive Vice President and Chief Credit Officer

So, for two single-family loans, because of the borrower didn't file bankruptcy, so we cannot take it back through the bankruptcy proceeding. Currently, it's under a state level, just normal foreclosure process. So one of the loan we have $2.6 million, which will be scheduled to be auctioned in April. And the other one is scheduled to be auctioned in June sometime, if there's no delay.

Li Yu -- Chairman and Chief Executive Officer

Okay. So therefore, I mean, when you say appraisal value would drop a little bit, what's the most recent one?

Nick Pi -- Executive Vice President and Chief Credit Officer

The most recent one is the $3.2 million for that property. Our loan is only $2.6 million. So there is still no loss at all. And we have solid buyer in line now for over $3 million.

Don Worthington -- Raymond James -- Analyst

Okay. Great. Thanks for the update. And then did you receive a special dividend from the FHLB this quarter?

Edward Czajka -- Chief Financial Officer

Yes, we did.

Don Worthington -- Raymond James -- Analyst

How much was that and then where did you report it?

Edward Czajka -- Chief Financial Officer

It was $193,000 and it's reported as part of investment income.

Don Worthington -- Raymond James -- Analyst

Okay. So that helped the margin a little bit this quarter then?

Edward Czajka -- Chief Financial Officer

Yeah, but those yields, those FHLB stocks, I shouldn't even say this on the call, have been very, very silent silent (ph).

Don Worthington -- Raymond James -- Analyst

Yeah, yeah. Okay. And then in terms of the net charge-offs of $6.5 million, was that entirely related to the New York properties or was there anything else in there?

Li Yu -- Chairman and Chief Executive Officer

No. Actually, that's very comping (ph). New York property accounts for most of that. They are king of all the old accrued loans on the properties -- on the loan being resolved, OK. That accounts for about $1 million or so, right?

Edward Czajka -- Chief Financial Officer

Yes, $950,000. Yeah, around $1 million.

Li Yu -- Chairman and Chief Executive Officer

Around $1 million or so, OK. So they also complicate situation as that when you have a charge-off, the accounting rules caused for you to calculate historical reserve to change based on the way of being calculated. So the reserve number also change, the adds or subtracts on different things. So all-in-all is, I would say, most of the things are related to the New York thing.

Don Worthington -- Raymond James -- Analyst

Okay. Great. Well, congratulations on disposing off that $4.1 million property that had been there for quite a while.

Edward Czajka -- Chief Financial Officer

Yeah, that seems to get lost in the conversation.

Don Worthington -- Raymond James -- Analyst

Yeah. All right. Thank you.

Operator

And ladies and gentlemen, this will conclude our question-and-answer session. I would like to hand the conference back to Mr. Yu for his closing remarks.

Li Yu -- Chairman and Chief Executive Officer

Thank you so much for your attention that -- as I said that, we will approach with extreme -- well, I shouldn't say cautious, extreme prudence, OK, that with our new economy in 2019 and everything else. But again, that we hope everything is not as bad as the most recent stock market meltdown that created all the conversation. Thank you so much. Thank you.

Operator

Thank you, Mr. Yu. Ladies and gentlemen, the conference has concluded. Thank you for attending today's presentation. At this time, you may disconnect your lines.

Duration: 28 minutes

Call participants:

Tony Rossi -- Investor Relations

Li Yu -- Chairman and Chief Executive Officer

Aaron Deer -- Sandler O'Neill -- Analyst

Edward Czajka -- Chief Financial Officer

Stephen Moss -- B. Riley FBR -- Analyst

Nick Pi -- Executive Vice President and Chief Credit Officer

Tim Coffey -- FIG Partners -- Analyst

Wellington Chen -- President and Chief Operating Officer

Don Worthington -- Raymond James -- Analyst

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