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Preferred Bank (NASDAQ:PFBC)
Q4 2019 Earnings Call
Jan 23, 2020, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon and welcome to the Preferred Bank Fourth Quarter 2019 Earnings Conference Call and Webcast. All participants will be in listen-only mode. [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.

Tony Rossi -- Senior Vice President

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

Li Yu -- Chairman and Chief Executive Officer

Good morning. For the quarter ended December 31st, 2019, our Bank has earned a net income of $1.31 a share. This is a slight decrease of a penny 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. 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 a little less than 12%.

First quarter deposits growth -- I mean, fourth quarter deposit growth was $114 million on an annualized basis of 12%. For the year, our total deposits has grown $344 million or 9.44%. As we are all aware of, there has been three rate cuts right in between July and October. All these rate cuts that financially affect 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 or 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. And I'm ready to answer your questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] Our first question is from Steve Moss with B.Riley FBR. Please go ahead.

Steve Moss -- B.Riley FBR -- Analyst

Hi. Good morning.

Li Yu -- Chairman and Chief Executive Officer

Hi, good morning.

Steve Moss -- B.Riley FBR -- Analyst

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

Li Yu -- Chairman and Chief Executive Officer

Probably, I don't know how much first quarter is -- what loan production will be. What is slipping to the first quarter,the -- every quarter end, there is some slippage to next quarter, but the extraordinary in my estimation probably in the $40 million to $50 million range.

Steve Moss -- B.Riley FBR -- Analyst

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

Li Yu -- Chairman and Chief Executive Officer

We are able to produce whole other loan during the year. 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 pay-off is almost $700 million. So from that point on, we have not seen the sort of the loan activities, but the coming year with a 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.

Steve Moss -- B.Riley FBR -- Analyst

Okay, that's helpful. And then, on expenses, just with -- I hear you on the cost controls. But this of course seemed exceptionally low and maybe a little bit kind of one-time nature of the 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?

Li Yu -- Chairman and Chief Executive Officer

Ed, do you have some feeling about that?

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

Yes, so as you know, we got some benefits 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's 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 system. So we're starting to see that come to a slow down. 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.

Steve Moss -- B.Riley FBR -- Analyst

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

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

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. But that's kind of where we think it's going to fall kind of in that neighborhood.

Steve Moss -- B.Riley FBR -- Analyst

All right. Thank you very much.

Operator

The next question is from Aaron Deer with Piper Sandler. Please go ahead.

Aaron Deer -- Piper Sandler -- Analyst

Hey, good morning, everyone.

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

Hi, Aaron.

Aaron Deer -- Piper Sandler -- Analyst

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

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

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

Aaron Deer -- Piper Sandler -- Analyst

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 and then maybe see some expansion as we move through the year. Could you give us some specifics in terms of 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 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?

Li Yu -- Chairman and Chief Executive Officer

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

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

It was 87 basis points.

Li Yu -- Chairman and Chief Executive Officer

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

Aaron Deer -- Piper Sandler -- Analyst

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

Li Yu -- Chairman and Chief Executive Officer

The continuing -- TCD cost decreases is continuing from day-one. Okay. But we don't look at things, we don't know is what loan gets paid off. Okay. What coupon rate it carries compared to new loan will be made as additional [Phonetic].

Aaron Deer -- Piper Sandler -- Analyst

Right. Okay. Thank you. I'll step back.

Operator

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

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

Thanks. Good morning, guys.

Li Yu -- Chairman and Chief Executive Officer

Hi, Gary.

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

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

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

Yeah. That is correct. We'll have the elevated...

Li Yu -- Chairman and Chief Executive Officer

Payroll taxes.

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

Payroll taxes related to the annual bonus.

Li Yu -- Chairman and Chief Executive Officer

You said it right, you're very correct.

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

Yeah.

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

Okay. And then, the commentary, just a moment ago on the CD repricing kind of the 70 basis point repricing GAAP outlook, does that continue -- is that repricing GAAP what you'd expect for the majority of the year or is that more through the first, call it, couple of quarters before the kind of GAAP lessens in the back half of the year? Well, I would give you a generality and ask for my colleagues to also add there. They're feeding about it. You see that the -- one of the things that we subject to is competition, OK. We cannot be [Indecipherable] 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 all repriced in general. So, this is that. Well, on the other situation for instance, OK, a couple of major banks still paying 1.75% on money market. Okay. So, we have suspended Don as he tried [Phonetic] to retain them even at a current rate. So, the competition really is the main issue, but our coupon right now is reflecting a continuous cost reduction. Anything to add?

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

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 -- first two quarters, I think you'll see the most benefit, and then it will start to wane in Q3.

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

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?

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

Total deposit average?

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

Yeah.

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

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

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

Thank you.

Operator

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

Tim Coffey -- Janney Montgomery Scott -- Analyst

Thanks. Good morning, gentlemen.

Li Yu -- Chairman and Chief Executive Officer

Hi, Tim.

Tim Coffey -- Janney Montgomery Scott -- Analyst

Ed, a question for you and perhaps for you, too Mr. Yu. The trends in your demand deposits have an exceptionally strong, especially in the last two quarters, or what are you seeing in that's allowing you to grow those deposits.

Li Yu -- Chairman and Chief Executive Officer

Oh, boy, actually, maybe now if you really want to think about it. I think last quarter, we've been lucky, maybe in some cases that we see at the year end some customer always bringing some cash to their balance sheet, whether it's by collection from the receivable, whatever are ready to pay the expenses, bonus as all those other thing in early part of the year.

But in general that the bank has to take a priority as grow demand deposits even ranking ahead of growing the loans. It's very hard for us to being our size and being -- we are one-off type of bank, It's very hard for us to tell you right now what we think it will be. Okay.

Wellington, you have a crystal ball, you want to add on that?

Wellington Chen -- President and Chief Operating Officer

Tim, I don't have a crystal ball. However, I think that its also add on to what Mr. Yu mentioned is our continue pursue of focusing on the chief deposit at DDA. In terms of the loans, the loans that we originate and demanding the operating account and expanding our C&I business as well in that. That also drives up the DDA.

Tim Coffey -- Janney Montgomery Scott -- Analyst

Okay. And then, [Indecipherable] 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?

Li Yu -- Chairman and Chief Executive Officer

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

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

Well, our tax season.

Li Yu -- Chairman and Chief Executive Officer

Yeah. By April 30, things all change.

Tim Coffey -- Janney Montgomery Scott -- Analyst

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

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

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

Tim Coffey -- Janney Montgomery Scott -- Analyst

Okay, all right, thank you very much for the color, everybody.

Li Yu -- Chairman and Chief Executive Officer

Sure.

Operator

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

Tony Rossi -- Senior Vice President

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.

Operator

[Operator Closing Remarks]

Duration: 20 minutes

Call participants:

Tony Rossi -- Senior Vice President

Li Yu -- Chairman and Chief Executive Officer

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

Wellington Chen -- President and Chief Operating Officer

Steve Moss -- B.Riley FBR -- Analyst

Aaron Deer -- Piper Sandler -- Analyst

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

Tim Coffey -- Janney Montgomery Scott -- Analyst

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