Preferred Bank Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 23, 2024

There are 9 speakers on the call.

Operator

Good day, and welcome to the Preferred Bank First Quarter 20 24 Earnings Call. All participants will be in listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Jeff Haas of Financial Profile. Please go ahead.

Speaker 1

Thank you, Nick. Hello, everyone. Thank you for joining us to discuss Preferred Bank's financial results for the Q1 ended March 31, 2024. With me today from management are Chairman and CEO, Lee Yu President and Chief Operating Officer, Wellington Shen Chief Financial Officer, Edward Cieca and Chief Credit Officer, Nick Pye. Management will provide a brief summary of the results and then we will open up the call to your questions.

Speaker 1

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 1990 5. 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.

Speaker 1

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.

Speaker 2

Thank you very much. Good morning. I'm very pleased to report that Preferred Bank's 1st quarter net income of $33,500,000

Speaker 3

or

Speaker 2

$2.44 per fully diluted share. This quarter, our loan growth was annualized at 4% and deposit growth was 6.5% annualized. This quarter, our net interest margin is 4.19%, which is a slight decrease from previous quarter. Looking ahead, the 2nd quarter NIM likely will also compress, but we don't think it's

Speaker 4

going to

Speaker 2

be very significant. It's going to be a mic compression. The reason for the compression in the Q1 is continued increase in cost of deposits. As of March 31, total criticized loans is $87,600,000 which is 3 point $6,000,000 higher than the $83,000,000 at year end. I know there's a math mistake somewhere, but that's because you have to round out three numbers.

Speaker 2

And in non performing loans has reduced from $28,700,000 at EN to $18,200,000 in Q1 end. This quarter, we have a charge of $3,500,000 related to loans that previously identified with loss content and fully reserved for. Them. This quarter, our provision is $4,400,000 The reserve allowance now stands at 4.49%. On the business side, we have just opened a new branch in Orange County, Irvine area.

Speaker 2

This is a full service branch staffed with a team of deposit personnel and a team of loan personnel. We also practically, as of right now this minute, open up a Sunnyvale loan production office in the Silicon Valley area. And we plan to continue to add relationship personnel in the remainder of the years. Since Q3 last year, we have been trying to reduce the sensitivity of our loan portfolio. And as of today, we believe it's a much better balance with our deposit composition.

Speaker 2

With the current changes in trend of interest rate movement, we will obviously monitor the situation and making the necessary adjustment to control our interest rates risk even better. Thank you very much, and I'm ready for your questions.

Operator

We will now begin the question and answer session. The first question comes from Matthew Clark with Piper Sandler. Please go ahead.

Speaker 3

Hey, good morning, everyone. Maybe, Ed, just to start on the NIM, trying to get some visibility into 2Q, if you had the average NIM in the month of March and the spot rate on deposits at the end of March?

Speaker 5

Yes. The I was ready for you, Matthew. The NIM for March was 4.11 Spot rate on deposits was $404,000,000

Speaker 4

Okay.

Speaker 3

And that $404,000,000 is at the end of the month or was it the average in the March?

Speaker 5

That's the average for the month, yes.

Speaker 3

Okay. Got it. Okay. And then, I think you all hired some producers in the Q4, and you had some good growth in both loans and deposits. Wanted to get a sense for your pipeline of loans and deposits and your growth outlook for the year?

Speaker 2

Well, first of all, I don't think we have add too many people in the Q4, but also in the Q1, okay. When you add the relationship officers, usually it takes about 1.5 to 2 quarters before they can materialize into their portfolio start to materialize. And also as you probably know our business that for every 10 people you hire, you hope everyone works, but not necessarily, okay? But we're just hopefully that we'll land some stars that balance out the whole situation. With the pipeline and one other thing, you want to explain the pipeline first, Matt?

Speaker 6

Well, thank you, Mr. Yu. Matt, our pipeline is relatively healthy. I think that we are really, as Mr. Yu mentioned, that really focus on taking care of our existing customer and right now there's quite a bit of opportunity for them and that's our priority.

Speaker 6

So in turn, yes, that's where we are. The pipeline is pretty healthy.

Speaker 3

Okay. And then

Speaker 2

the

Speaker 3

Sorry, the other question I had, I think was, yes, around the city repricing. Can you just remind us what you have coming due over the next couple of quarters in the rate differential and when that gap might close or completely?

Speaker 5

Yes. So we have Q2 TCDs of about just under $1,000,000,000 maturing, they're at an average rate of 4.9. So we don't see a lot of differential there with respect to what's going to be maturing, with respect to what's going to come back on. Q3, that number dips a little bit to $374,000,000 in terms of maturities. So we don't expect a lot of movement in the standpoint on the deposit side from TCD rates going up dramatically from the portfolio rate that we're at right now.

Speaker 3

Okay. And then, just on credit, can you remind us of the non performer that you're able to sell at par? What type of credit that was? Obviously, great to see. And then just the incremental increase in criticize.

Speaker 3

I know it wasn't a big number, but just would like some color there.

Speaker 2

Well, obviously these things are coming in and out and has a different time and different stage. So, some of those criticized loans will migrate into the non performing area and we have obviously, it is our job to identify them in the very early stage to provide the proper reserve on the whole situation, okay, so that the loss content has been accounted for and will not be affecting the future years, okay? So with your question, Nick, do you have anything to add?

Speaker 7

Not really. Just give you a little bit more color about those two loans related together. We sold the note at the park plus a little bit small premium on that. So just like Mr. Mentioned, it's migration in and out for credit.

Speaker 7

So I believe we didn't notice any significant trend of credit side.

Speaker 3

Great. Thank you.

Operator

The next question comes from Andrew Terrell with Stephens. Please go ahead.

Speaker 4

Hey, good morning.

Speaker 2

Good morning, Andrew.

Speaker 4

My first question was around just the loan yield expansion you saw this quarter, 7 basis points sequentially. It was up pretty nice. I was just curious, was there any kind of outsized interest recovery or anything like that, more one time in the 1Q loan yields? Or was this more just a function of loan growth and kind of churn in the portfolio towards higher rates?

Speaker 5

Yes. Good question, Andrew, and good pickup there. We actually had a prepayment penalty on a fairly large credit in the month of March, a little over $200,000 and that helped to drive yields just a little bit.

Speaker 4

All right. Just a little above 200,000?

Speaker 2

Yes. Yes. These things happen each quarter. We hope that we have some prepayment penalty each quarter, although it was very interesting to me. I'm not trying to

Speaker 4

Understood. Got it. Yes, we'll hope for more. On the I was looking at a comment from your earnings release around the rate sensitivity position and kind of some adjustments in the loan portfolio to maybe dampen out that sensitivity. But looking back at the annual report, I think you guys are disclosed down 7% to NII with negative 100 basis points in short term rates.

Speaker 4

Has that moderated significantly as of the threethirty one? Or can you just speak a little more to how the balance sheet is tempered in terms of rate sensitivity?

Speaker 5

Well, it has tempered. I can't give you the number right now on the down 100 scenario, Andrew. But suffice to say, what Mr. Yu was alluding to earlier is a number of things, doing a few more fixed rate loans than we've done in the past. And with respect to loans that are renewing or coming up for renewal, if their remaining floating rate, we're moving the floors up from where they were previously.

Speaker 2

I'll fix it with the situation. Or Now I can give you a rough number right now. I cannot tell you the exactly down 100 basis points and so on. We haven't got a chance to do that. I think previously, we would disclose to you our asset I mean, rate sensitive asset loans.

Speaker 2

It's about 80 some percent to 87%, I can't quote you exactly, it's about 80%. Now we're down to about mid-seventy percent, okay, or maybe slightly lower than mid-seventy percent, okay? So if you compare to the I mean, liability sensitive liability we have, that we're in critical balance right now.

Speaker 4

Yes. Okay. Yes, the mid-70s is, yes, definitely a big move. That's really helpful. I appreciate it.

Speaker 4

And then maybe one on the expense base, just expectations on kind of the 2Q expense run rate? I know there's it looks like maybe a new LPO opening. Just curious on how you see expense trending in the Q2?

Speaker 5

So a number of things that Mr. Yu and Wellington alluded to, we have the new Irvine office, which is in a prime, prime location in Orange County and the Culver Center in Irvine. In addition to that, the Silicon Valley LPO, both of those require staff as well as lease costs. So I think going forward, I think the $20,000,000 you saw this quarter is probably a fairly plus or minus going forward for next quarter.

Speaker 4

Okay, very good. Thank you for taking the questions this morning. I appreciate it.

Speaker 2

Thank

Operator

you. Our next question comes from David Feaster with Raymond James. Please go ahead.

Speaker 8

Hi, good morning everybody. We you touched on the 2 NPAs, but I was hoping to get your thoughts on credit more broadly. You've got a track record of being aggressive managers of credit. I'm curious, what are you seeing more broadly in the health of your clients? Are you seeing any signs of stress and just any thoughts on credit more broadly from your perspective?

Speaker 2

Okay. Let me state that from way back, let's say in 2022, okay, a little bit earlier, when we started to worry about the rates and credit and so on and inflation and so on. If I have seen a thought that the with this period almost 2 years gone by with the charge offs we have and the loss we have had and the level of NPLs and the level of criticized assets is as of today, I wouldn't be so happy those days, okay. But as you know that one of the trick in dealing with the credit is try to identify early and try to fully reserve that, okay. So that's our basic principle.

Speaker 2

But talking about with our customers' concern, most of our customer started to turn a little more positive. And basically, obviously, inflation is one factor is down. And another factor, the rate is stabilized, although everybody would like to see it down a little bit. But all we all know from this point of time, sooner or later it's going to be lower. It's a matter of whether it's half a year or 1 year or whatever.

Speaker 2

Sooner or later, we'll be back on that. And from what I read for all the big banks reporting numbers, their credit posture is also better than expected and are internally expected or what, okay? So generally speaking, I think the marketplace is start to feel, see the light at the end of the tunnel. In fact, many of our more opportunistic customers started to thinking about new investments.

Speaker 5

Okay.

Speaker 7

I wonder if that's what you

Speaker 2

have. I mean, any additional thing related to

Speaker 8

That's great color. Does that mean does that indicate that maybe you're having a bit of maybe less cautiousness and maybe that we should see growth start to accelerate? It sounds like demand starting to improve. You alluded to improving pipelines. It seems like you strategically decelerated growth from the conversations that we've had.

Speaker 8

Does it sound am I reading between the lines that maybe we could see you're a bit less cautious today and we could see growth reaccelerate in the back half of the year?

Speaker 2

I don't want to be really associate growth being less cautious, okay. I think that if I put it right, situation is that there finally seems to be that we can take on the opportunity that will be presented to us and we have to be ready. As you know, your ad personnel that their production will come maybe 3 to 6 months later, so that's not immediate effect on that. And the general feeling is that, as I said, to me, I personally believe the big picture is that rates is finally coming down and sooner or later it will stabilize into a new norm situation, which will be reasonably lower than it is today. And although every pricing activity is adjusted to the new loan, new rate, every pricing new to inflation number, product number, things will start to sort of like normalize themselves.

Speaker 2

And with our current strengths of economy, I personally believe that business opportunity has increased and there will be less risk doing transaction today as compared to 1 year ago.

Speaker 8

That makes sense. Makes a lot of sense. Thank you for that color. And then last one for me, maybe just following up on the branch expansion LPO. I love seeing the continued expansion in investment.

Speaker 8

I'm curious how do you think about de novo expansion priorities at this point? What other markets are interesting to you? And just kind of curious how you think about as you continue to expand, where are you focused?

Speaker 2

David, our expansion really has 2 different directions. One is that areas we think we have a lot of business, okay, how we want to be. And another situation is that when we have the personnel. And preferred bank is small institutions, so almost we can go anywhere and get a reasonable amount of business with a new operation. And therefore, if we are finding the banker has the book of business, we tend to build a team around him and I mean settle down with the operation there.

Speaker 2

Having said that, and Silicon Valley is one of the area that we have wanted to be there. And then we have never been able to get the right person there in the last 10 years or so on. Finally, situation comes. Wellington is able to locate a couple of people he think will be fitting to our needs and so on. So we are starting that particular offering.

Speaker 2

It's a right place for us and probably the people is the right people now.

Speaker 8

Okay. That's helpful. And maybe just if I could squeeze one more. You've been real active repurchasing stock. Curious maybe with potential for organic growth to accelerate and the move in the stock that we've seen, here's your capital priorities and your appetite for additional buybacks?

Speaker 2

We have always been letting our shareholders know that growth in the normal situation is our preference as it represents the best long term value. But within the last 3, 4 years, starting from the pandemic with the inflation and so on, While the bank is making over 20% return with the cost of alternative cost in the 5% range, okay, it does not seem a good idea that had the idle cash, which we're not doing much loan, nobody is doing much loan those. With idle cash being staying there, I'm making 5%, buyback on stock represents a pre tax 33% return. So economics tells me that our shareholders would like to settle over the long term if we do that.

Speaker 8

Makes a lot of sense. All right. Thanks, everybody.

Operator

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

Speaker 2

Thank you very much. As I said that we're very happy with the quarter and hopefully that I personally believe that finally things started to getting stabilized and going forward, I hope it can only be better for the banking industry.

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Key Takeaways

  • Preferred Bank reported Q1 net income of $33.5 million (or $2.44 per diluted share), with annualized loan growth of 4% and deposit growth of 6.5%.
  • Net interest margin declined to 4.19% and is expected to compress modestly in Q2 as deposit costs continue to rise.
  • Credit metrics show criticized loans rising to $87.6 million while nonperforming loans fell to $18.2 million, backed by a 4.49% reserve allowance and a $3.5 million charge on previously reserved loans.
  • The bank opened a new full-service Irvine branch and a Sunnyvale loan production office, and plans to add more relationship personnel to drive future growth.
  • Management has reduced portfolio rate sensitivity to mid-70% and describes its loan pipeline as healthy amid stabilizing interest rates and improving customer sentiment.
AI Generated. May Contain Errors.
Earnings Conference Call
Preferred Bank Q1 2024
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