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Preferred Bank (NASDAQ:PFBC)
Q4 2020 Earnings Call
Jan 26, 2021, 2:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Preferred Bank Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Jeff Haas of Financial Profiles. Please go ahead.

Jeffrey Haas -- Investor Relations, Financial Profiles

Thank you, Andrew. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the fourth quarter ended December 31, 2020. With me today from management are Chairman and CEO, Li Yu; President and Chief Operating Officer, Wellington Chen; Chief Financial Officer, Edward Czajka; and Deputy Chief Operating Officer, Johnny Hsu. 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 that 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 very much. Good morning, ladies and gentlemen. I'm very pleased to report fourth quarter of 2020. Preferred Bank's net income was $20.8 [Phonetic] million or $1.40 a share. This is a new record for our Bank. And on the PPPT or pre-tax, pre-provision basis, 2020 is also a record year of Preferred Bank.

This quarter's net income, net interest income and net interest margin are all enhanced or benefited by two relatively non-recurring items. First of all is the recovery of interest of $473,000. The next one is fees earned now terminated Main Street Lending Program of $499,000. Net interest margin came in for the quarter at 3.66% or 12 basis points better than previous quarter. But without these non-recurring items, it would have been 3.58%, 4 basis points better. Again, this quarter, the reduction of interest cost or deposit costs outpaced the moderation of our loan yield.

Looking ahead, we shall have continued interest cost saving in the first quarter as roughly $330 million of time certificate deposits will be repricing for roughly $0.50, or 50 basis point savings. For the quarter net income was negatively affected by a loss on sale of securities of $660,000. For the quarter, loan growth is $86 million or 2.2% sequentially. This is very encouraging after a long drought and during the midst of pandemic.

We have seen our customers seem to be much more positive on our nation's economy. First quarter loan booking has really picked up. Deposits, however, grew only mildly at $28 million and as the liquidity of the Bank remain very good.

Perhaps the most comforting things to us is improvement in our credit posture. After nearly years of uncertainty related to the pandemic, we finally see things are getting better. Specifically, deferred loans now reduced to $28 million compared to the peak time of $610 million. But most of these deferments are partial deferments. We'll be deferring the principal only and continue to collect interest.

Total non-accrual loans now reduced to $20.5 million. 30 to 89 days past due loans, which is usually a early signal on the credit situation stands at $4.1 million at the end. There were no 90 days past due loans. And total classified loans is now $55 million, which includes a $23 million TDR, which is performing. At December 31, total reserve is 1.6%.

We were, and we will always be careful regarding our operating expenses. Efficiency ratio again came in 29.9% for the quarter. With the availability of vaccine, although it is quite a chaotic situation in Los Angeles county, but with its availability and with the likelihood of a stimulus package from Washington, we believe things will be much better and we believe 2021 will be a good year for Preferred Bank. Thank you.

I'm ready for your questions.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Nick Cucharale of Piper Sandler. Please go ahead.

Nicholas Cucharale -- Piper Sandler -- Analyst

Good day, gentlemen. Hope you all are well.

Li Yu -- Chairman and Chief Executive Officer

Thank you, we are.

Nicholas Cucharale -- Piper Sandler -- Analyst

Good, good. So first, a nice rebound in loan growth this quarter, specifically in three balances. Was the production broad-based across your geographies? I'm just trying to get a sense if the activity was specific to one of your markets, given differences in pandemic-related impact across the country?

Li Yu -- Chairman and Chief Executive Officer

For us it's across -- I mean, it's all across all the growth, but Wellington, you want to first give some color on that.

Wellington Chen -- President and Chief Operating Officer

Yeah. Hi, Nick. This is Wellington. Production is pretty evenly distributed, we think, in our geographical footprints, of course, Southern California and North Cal as well as the East Coast and New York area. It's very well balanced.

Nicholas Cucharale -- Piper Sandler -- Analyst

Great. And then secondly, on the margin, I appreciate you calling out the one-time items then the maturity schedule. Even so you posted core NIM expansion. Do you feel like you still have some room for declining liability cost to outrun erosion in asset yields for the next couple of quarters or is that going to be challenging to maintain?

Li Yu -- Chairman and Chief Executive Officer

Yes, it will be -- liability cost would be generally on the very positive trend. First of all, is the first quarter, I mean, we have $330 million of PCD maturing, OK, which will be repriced at probably 50 basis points less. Okay. And the second quarter, we may have a little bit of residual effect of the first quarter, but I mean provided the market interest rate doesn't change due to competition. Okay? And very highly likelihood with refinancing our sub-debt, OK, at the end of second quarter, which will result, at today's market condition, a reasonably good savings. So we are positive regarding our interest cost outlook.

Nicholas Cucharale -- Piper Sandler -- Analyst

That's great color and impressive work on driving the modifications down this quarter, no hotel loans on deferral was especially positive to see. When it comes to asset quality in the current portfolio, what is particularly top of mind for you? What are you guys worried about?

Li Yu -- Chairman and Chief Executive Officer

Well, obviously, we would be worried about the continuous lockdown extending to a long time. Mostly the people seeking deferment and many of the people have been digging out of their savings, especially, we forgot one group of people, those core landlords, OK, have their property leased to -- pre-leased to either to people that lost their job or leased to the business that's closed and so on. They have been handling for quite a period of time. Okay? And in our particular case, we're benefited by origination at the low, OK, LTV level. If you look at the table that we're presenting, they're basically in the 60% [Phonetic]. And second of all, since 99% of the loan require a sponsorship or personal guarantee, OK, and we're very careful about the global cash flow, obvious question of people. So we have been having some good reduction in cluster for all the categories. But the people that's still -- they have been -- the people had about a one year of basically no business. Okay? So [Technical Issues] that needed some help. They've been paying along the way, and they finally need some help.

Nicholas Cucharale -- Piper Sandler -- Analyst

Okay. And then lastly for me, a big step up in fee income from letters of credit. Do you expect that line to stay elevated at this level in coming quarters or revert back to where it was earlier last year?

Li Yu -- Chairman and Chief Executive Officer

We think it's going to be relatively stable, but Ed and then Wellington, you too can provide color on that. Right?

Wellington Chen -- President and Chief Operating Officer

Nick, I believe that, looking at our pipeline, but I think it will be relatively stable.

Nicholas Cucharale -- Piper Sandler -- Analyst

Thank you for taking my questions.

Operator

The next question comes from Tim Coffey of Janney. Please go ahead.

Timothy Coffey -- Janney -- Analyst

Thank you. Good morning, everybody.

Li Yu -- Chairman and Chief Executive Officer

Hi.

Timothy Coffey -- Janney -- Analyst

Hi. Mr. Yu, if we look at kind of the loan growth this quarter, is that a reflection of people getting out of the sidelines and getting back to business or was this a bit ahead of expectations?

Li Yu -- Chairman and Chief Executive Officer

Well, some of the people, I would say this all time, that some of them is getting off the sidelines. Okay? And basically, during the pandemic, it's very, very difficult to do business with new people, but we heard and we have seen new requests coming in and obviously, we are still in a mode of being highly alert mode. But there are some new requests coming in that represent new activities to us.

Timothy Coffey -- Janney -- Analyst

Okay. What does this quarter's loan growth tell us about the potential for loan growth next year as states like California start to reopen?

Li Yu -- Chairman and Chief Executive Officer

Well, it is probably -- I wish I have the crystal ball, it is always difficult to forecast the loan growth, especially quarter-by-quarter, if not anything else. But based on the first quarter activity, we have a total outstanding loans about $300 million new loans in the first quarter alone. And these represents $375 million of note amount, which means commitment amount. So we hope the effect will carry over for the first quarter. Okay? But again it has factors about when the lockdown will be lifted or partially lifted, because, for us, our people need to really have a very close contact with our customers. So there is some variables with it and -- but we're generally feeling positive about going forward.

Timothy Coffey -- Janney -- Analyst

And the customers you serve and the loans you like to originate, what's the competition level like right now?

Li Yu -- Chairman and Chief Executive Officer

I would jokingly [Phonetic] let Wellington answer the first. I have some personal observations.

Wellington Chen -- President and Chief Operating Officer

Yeah. Hi, Tim. This is Wellington. I think competition is still pretty stiff out there. We have a lot of competitor out there offering very low interest rate. We just don't know how they can sustain that going forward. But again we -- our workforce, we try to maintain discipline as Mr. Yu mentioned earlier, be selective and really just continue. I mean, it's always been the nature of our business throughout the history. So we just have to continue to work faster, more efficient.

Li Yu -- Chairman and Chief Executive Officer

Tim, this is Li Yu, OK? We're now facing whole lot of competition from banks, $50 million to $150 million was in our territories, OK, that it seems to be that our customers are basically high net worth individual, being sought after. So they can also give other business to -- for them. For instance, that we're finding people that giving out refinance on loan at low 3% 10-year fixed rate. And that is below our net interest margin. Okay? While we are obviously admiring their capability of doing that, there are many loans we decided not to match.

Timothy Coffey -- Janney -- Analyst

That's very helpful. And that is with our customer I was curious about. And then looking at expenses, if the economy starts to reopen, is there going to be the potential for upward pressure on expenses from additional traveling and marketing?

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

Hey, Tim, this is Ed. Looking forward in terms of non-interest expense, to the extent profitability improves in 2021 over 2020, you will see the salary and benefits expense increase over the year, because our bonus accrual is directly tied to the profitability of the bank. So that will go up. More specifically, to your point about reopening and travel costs and so forth, they're really not terribly significant for us as an entire company simply because our workforce relative to our asset size is still relatively small. So when you look at the line items, specifically, where we have actually benefited this year, it's in business development and promotion, as well as office supplies and equipment. And you'll see those line items actually went down year-over-year. So that's really where the benefit comes in, but outside of that, there's not a tremendous amount of benefit for us in terms of the lockdown. And then going forward, in terms of increasing non-interest expense with an opening up, we will have some increased expenses, but it won't be material.

Li Yu -- Chairman and Chief Executive Officer

Tim, I'd like to tell you something. Okay? The management team here is in a growth posture again because we feel pretty good about 2021. So likely, we will step up our effort in looking for new locations or new branches and new different things. Okay? So likely, somewhere along the year, our personnel expenses will be increasing -- our production personnel. And, obviously, those usually lead to, if we're successful, to a larger long-term benefit.

Timothy Coffey -- Janney -- Analyst

Yes, of course. All right, well, thank you very much. That's -- it's actually helpful.

Operator

The next question comes from David Feaster of Raymond James. Please go ahead.

David Feaster -- Raymond James -- Analyst

Hi, good morning, everybody.

Li Yu -- Chairman and Chief Executive Officer

Hi.

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

Hey, David.

David Feaster -- Raymond James -- Analyst

I just wanted to follow up on your last comment about new offices and just curious, are there any new markets which you might be interested in organic expansion into? And just kind of how are you thinking about that in terms of organic expansion side?

Li Yu -- Chairman and Chief Executive Officer

Yeah, we -- first of all, I have always seen one thing is that, OK, our organic market comes with the way that we can lend a team of producers. We usually -- whenever we found a able banker, then we round them up with a team of supporting cast, then start a business there. That goes along with every branch that we have opened, even in the -- our neighborhood of Los Angeles area, and even consider about the California area, we have so many new spots, which are not represented by us, which represent vibrant business centers. Our hard work really is the locating of our people. So whenever we see this opportunity, there will be a new organic -- new trees being [Indecipherable].

David Feaster -- Raymond James -- Analyst

Okay. Okay. And then in terms of asset quality, I mean, you guys have continued to improve, your defensive posture has proven itself. We've actually seen your reserve ratio continue to grow. I guess, just in light of the improved economic outlook and improved credit quality, how do you think about the opportunity to potentially release reserves and maybe at what point would you think you'd be comfortable doing so and then what's kind of like that more normalized reserve ratio? Is it closer to 125 [Phonetic] which we saw in the first quarter '20? Is that kind of where we should be looking at?

Li Yu -- Chairman and Chief Executive Officer

Well, I'm looking at the trend. Okay? So if asset quality remain, I mean, not turning to the worse, OK, I can see, first of all is a reduction of provision that has very minimum provision. And then somewhere along the year, I can see that we may be able to release some of the reserve. Okay? But all it depends on how the situation plays out and also it has to some extent with a growth rate we will have. Okay? It also affected the situation. But generally speaking is, based on what we are today at this point of time, I can see the whole year's provision expense will be very little comparatively speaking.

David Feaster -- Raymond James -- Analyst

Okay. That makes sense. And then just, I'm just curious, historically you guys have been pretty asset sensitive. And I'm just curious how that stands today, just in light of the liquidity and the impacts of floors and maybe how your asset sensitivity has changed. And then just how you are thinking about managing your sensitivity going forward?

Li Yu -- Chairman and Chief Executive Officer

Ed, you and I share this question, how is that?

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

Sure.

Li Yu -- Chairman and Chief Executive Officer

Okay. You start first.

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

Okay. Well, the interest rate situation is very interesting right now, simply because we have such a divergence between the long and the short end and the curve seems to be continuing to steepen. But relative to our own balance sheet, you kind of hit the nail on the head. We have a lot of cash, which is very asset sensitive, obviously, on an overnight basis and then the adjustable rate loans roughly 80% of the book is floating rate. And so with approximately 70% floors on those, and a number of those large -- preponderance of those being below their floors, it will take maybe one or two to three -- this is very similar to the scenario we had a few years back when we were talking about the same thing, waiting for rates to rise, and we had loans below their floors waiting for them to come up above their floors. And then we really saw the acceleration of the yields on the asset side, once that took place. But in terms of asset sensitivity, right now, from a quantitative standpoint, it's still -- we're still definitely quite asset-sensitive.

Li Yu -- Chairman and Chief Executive Officer

Okay. Obviously, at this point of time, the 80% of our loans are with floors -- floating-rate loans. Okay. Many of them are with floors. Okay? So we are operating currently a little bit underfloor, OK. I mean, the floor is higher than the coupon rate. Okay? So going forward, I mean, if rates is going to change to the upward, I don't know when that would do that, OK, maybe perhaps the first 25 to 50 basis points, we will not see some of our loan rise to the new rate. But on the defensive side or on the offsetting side, we have a large $1.6 billion [Phonetic] of PPP portfolio. We'll be gradually pricing, OK, along the interest rate -- repricing along the interest rate increase for the two of them usually offset somewhat to each other. The exact is the payment, the timing of those things. And we have always been, in our history, tried to maintain this aspect very carefully.

David Feaster -- Raymond James -- Analyst

Okay, that's helpful, thanks everybody.

Operator

The next question comes from Steve Moss of B. Riley. Please go ahead.

Steve Moss -- B. Riley -- Analyst

Hi. Good morning.

Li Yu -- Chairman and Chief Executive Officer

Hi.

Steve Moss -- B. Riley -- Analyst

Just to start off with -- just following up on yields here, just kind of curious what were origination yields for the quarter in terms of pricing these days?

Li Yu -- Chairman and Chief Executive Officer

Okay. For the quarter, we are already balancing the loans, OK, in the pricing, I have that handy right with me right now. Okay? With the average rate in 4.85%. OK. So, the -- as you -- in the same quarter, you have payoffs. Okay? Payoffs a little bit higher, about 30 basis points higher. That is the one of the main reasons we have moderate yield compression.

Steve Moss -- B. Riley -- Analyst

Okay. That's helpful. And then on the CD side, kind of, curious as to where your offering rates are these days.

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

Hi, Steve. This is Ed. On a one-year CD, our offering rate is right around 50 basis points and that kind of holds true down through the six-month and three-months, probably as well. It's become a market that doesn't care terribly a lot about terms in terms of one year, two year, six months right now.

Li Yu -- Chairman and Chief Executive Officer

Steve, if you noticed that the first quarter we had lost some PCDs, OK, and that is because we decided not to match those maturing PCDs. The bank is too liquid, in my opinion, at this point of time. And so much cash sitting and earning 10 basis point compared. Okay? So those are the really more strategic move I think.

Steve Moss -- B. Riley -- Analyst

Right. Okay, that's helpful. And then in terms of capital here, building this quarter, it seems like its going to continue to build in 2021. Just kind of curious as to what your thoughts are on the potential for capital deployment.

Li Yu -- Chairman and Chief Executive Officer

Okay. First of all, as we continue this kind of a level of earnings, hopefully, there may be slight improvement in -- sometime in 2021. We obviously will be thinking about increase the dividend. That's almost a thing that we have dedicated that we will recommend to the Board. Okay? Now, the next thing is, obviously, as we always weigh is the, again in loan growth. Okay? If we have organic loans, let's say, were lucky enough to return to two years ago, getting in the teens, OK, then the redeployment capital basically will be largely through the using of the loan growth in the area. If we cannot have original loan growth then we will be looking at situation like the buyback. Okay? But all this is, is studying. I'm right now studying what if we have a buyback immediately. Okay? What effect would do to us in our current capital level. You see our primary capital level is slightly over 10%. Okay? So that is one area that we are studying and to see how comfortable we are doing things.

Steve Moss -- B. Riley -- Analyst

Okay, great. That's very helpful, thank you very much.

Operator

And this concludes our question-and-answer session. I would like to turn the conference back over to Li Yu for any closing remarks.

Li Yu -- Chairman and Chief Executive Officer

Well, thank you very much for your attention and as I said earlier, we had a good quarter and we hope it continues into next year and hopefully that all of us will be getting out of this pandemic soon and we're back to our normal life, get our freedom back, OK, which is probably more important than the performance of the Bank in any state plan. So with that, let's wish for the best for 2021. Thank you.

Operator

[Operator Closing Remarks]

Duration: 30 minutes

Call participants:

Jeffrey Haas -- Investor Relations, Financial Profiles

Li Yu -- Chairman and Chief Executive Officer

Wellington Chen -- President and Chief Operating Officer

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

Nicholas Cucharale -- Piper Sandler -- Analyst

Timothy Coffey -- Janney -- Analyst

David Feaster -- Raymond James -- Analyst

Steve Moss -- B. Riley -- Analyst

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