Preferred Bank Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2024

There are 9 speakers on the call.

Operator

Good afternoon, and welcome to the Preferred Bank Second Quarter 2024 Earnings Conference Call. After today's presentation, there will be an opportunity to ask Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Jeff Haas of Financial Profiles. Please go ahead.

Speaker 1

Thank you, Jamie. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the Q2 ended June 30, 2024. With me today from management are Chairman and CEO, Lee Yu President and Chief Operating Officer, Wellington Chen Chief Financial Officer, Edward Cieca and Chief Credit Officer, Nick Pai. 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.

Speaker 1

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.

Speaker 1

At this time, I'd like to turn the call over to Mr. Li Yu. Please go ahead.

Speaker 2

Thank you very much. First of all, I'd like to apologize to all of you for pulling you away from the opening ceremony. And thank you for attending the conference. I'm very pleased to report that Preferred Bank's 2nd quarter net interest and net income was $33,600,000 or $2.48 a share. This quarter, we have an annualized 8% loan growth and an annualized 5% deposit growth.

Speaker 2

For the quarter, we have a $9,000,000 charge offs. The charge offs are related to the loans that was previously fully reserved as of the previous quarter. And we had an increase in non performing loans of $22,000,000 I have included some details in our press release for your information and for your review. We believe these NPAs are either fully reserved or adequately protected by the collateral. And the resolution of these nonperforming loans will not likely cause any significant impact to our future earnings.

Speaker 2

It's worthwhile to point out the root of the loan losses came from the pool of criticized loans. This actually has reduced $13,000,000 from the previous quarter. And the migration pattern also seems to be improving. We have always been fairly consistent with the operating noninterest expense and noninterest income. Going forward, I am not seeing any significant changes to these factors.

Speaker 2

And we have been working to reduce the asset sensitivity of our balance sheet. We believe we're not far away from what we see as the optimal level for us. And the much anticipated and hoped for interest rate relief were not likely causing significant effect to our future income statements. A year ago, the bank announced a buyback program of $150,000,000 For the past 12 months, we have repurchased $72,500,000 of our own common stock. The regulatory approval for the program has expired.

Speaker 2

We are now seeking for re approval or extension for us to be able to repurchase the remaining $77,500,000 I'm pleased to report with the $72,500,000 repurchase, with a $2.80 a share dividend and with a reasonable growth in loan and deposits, the bank's TCE ratio actually improved by 53 basis points, just as we have planned. We attribute this to the bank's earning capability. Thank you very much. I'm ready for your questions.

Operator

Our first question today comes from Matthew Clark from Piper Sandler. Please go ahead with your question.

Speaker 3

Hey, thanks. Good morning, everyone. Just one on the margin. We've got the adjustment for the interest income reversal, but do you have the spot rate on deposits at the end of June and the average NIM in the month of June excluding that reversal?

Speaker 4

Yes. Total

Speaker 5

so the margin for June, 3.89 dollars Matthew and total cost of deposits is $408,000,000 has been consistent for a few months now. So I think we've hit the APACs there.

Speaker 3

Okay. So the $408,000,000 for the month of June in total, and the $389,000,000 includes that 11 basis point reversal?

Speaker 5

No, does not. That did not happen in June.

Speaker 3

Okay. Okay. Thank you. And then, your commentary about being I'm sorry, reducing your asset sensitivity. Can you be a little more specific at this stage?

Speaker 3

How much of your portfolio has floors? Where are they? And how would you view yourselves with each 25 basis point rate cut?

Speaker 2

We have a detailed flow analysis later on, we can provide you with. But in general, I'd like to say that during the past 12 months or maybe as much as 18 months, we have reduced our floating rate loans, okay? Actually, the fixed rate loans, we have increased from 11% to right now approximately 25%, okay? So the floating rate assets of floating rate loans has reduced likewise by about 14%, okay? So this is actually what we have done and we're comparing to our balance sheet's sensitivity of our liabilities, okay, then you can see that we're in general pretty balanced position.

Speaker 3

Okay, great. And then on expenses, maybe for you, Ed. It looked like there was a comp accrual reversal here in 2Q. Just can you quantify that? And then give us a sense for the run rate going forward here in the second half?

Speaker 5

Well, in terms of non interest expense, we came in a little light than I think what I had previously guided to. We had a decrease on the salary benefit side primarily due to payroll taxes on the bonuses incentive compensation, which is paid out every Q1. So going forward, looking at it, I would still keep the same guidance between $20,000,000 $20,500,000 Matthew.

Speaker 3

Okay. Thank you. Okay, I'll leave it there. Let others ask questions. Thanks.

Speaker 1

Thank you.

Operator

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

Speaker 4

Hey, good morning. Thanks, Matt, for letting me slide in here. Can you talk about the $18,000,000 hotel loan, I think you mentioned a 15% or 51% LTV. Can you just talk about when the last appraisal or valuation came in on this property?

Speaker 2

I think the valuation is about a little over a year ago when the rate when the hotel property is still undervalued, but value has actually improved. The reason that I want to say to you is that we are the unfortunate party that caught in the partnership fight. There's a money partner that owns 99% and the work partner owns 1%. And 2 of them, obviously, many deal together, they're starting to fight with each other. And the money partner really want to buy the 1% off.

Speaker 2

And the obviously, that deal does not has not made. So both side is taking their position. The Nuna Cruz is positioned that many partner takes and therefore we're fully expecting to redeem the property at the foreclosure date.

Speaker 4

Okay, understood. And then if I could just ask on the kind of asset sensitivity position, hear you on the kind of 75% floating and that mix has obviously come down, so helps for future rate cuts. But the cash position, any interest in taking some of that and fixing it in the bond book, just looking at the forward curve with several rate cuts in there right now?

Speaker 5

I would have I don't expect we would do anything dramatic, Andrew. There may be a point where we want to put some money to work here, but I wouldn't expect a massive investment in anything. We do like keeping both sides of the balance sheet relatively short.

Speaker 4

Yes, makes sense. Any thoughts on kind of incremental, I mean, your loan growth was pretty solid in the quarter. What are you seeing from a borrower demand standpoint? And how should we think about loan growth in the back half of the year?

Speaker 2

Andrew, can I take a little bit more time to answer that question for you? First of all, in the Q1, okay, when the country is full, I believe the 6 cuts, okay, we see the loan demand actually goes up due to many people want to commit to new investments. And these loans come to fruition in the Q2. Usually it takes a lag time, about 3 months to get loan deals loan done. And in the Q2, when the country believes there are no pay no recats will be run one recut, the demand is reduced, okay?

Speaker 2

So we are seeing that possibly at the end of Q3, the loan growth would be limited, okay? And although we are working we're cranking our engines up, try to work hard to try to get more loans, but the demand is not as high as the Q1. As we are now anticipating rate cuts again, we think that the end of Q4 likely that will be more increased loan production.

Speaker 4

Okay. So maybe a little bit slower near term, but to the extent that rate cuts, start to come in, maybe improvement late in the year into 2025?

Speaker 2

Yes, we do see that. As rate cuts are happening, we like to think we can getting closer to our historical growth rate.

Speaker 4

Very good. Okay. Thank you for taking

Speaker 3

the questions. I'll step back. Thank you.

Operator

Our next question comes from Gary Tenner from D. A. Davidson. Please go ahead with your question.

Speaker 6

Hey, good morning. Ed, hoping you could provide some of that data on the loan floors, say, after 50 or 100 basis points of rate cuts.

Speaker 2

Sure.

Speaker 5

So right now, Gary, about 21% of the floating rate loans, well, first off, 98% of the floaters have floors. So put that out there. And then of that, 21% of that is within 100 basis points, the 79% is outside of 100 basis points of cuts. But that is moving, as you can imagine, and that the 21% number continues to grow each month as loans are renewed.

Speaker 6

Got it. Thank you. And then I guess the natural other side of that question is just updating maybe the Q3 and Q4 CV maturities and kind of where your renewal rate sits right now?

Speaker 5

Yes. Q3, we have about a little under $1,200,000,000 maturing and Q4, we have just almost exactly $1,000,000,000 maturing. Those are at average rates right around 5% each. So we would expect some relief in the coming quarters as rates have started to come down.

Speaker 7

Great. Thank you.

Operator

Our next question comes from Eric Spector from Raymond James. Please go ahead with your

Speaker 7

question. Hey, this is Eric Dowin in for David Feaster. Thanks for taking the questions. Just wanted to touch on the deposit side of the coin and get a sense of trends in the quarter, especially how NIB core deposits trended later in the quarter into 3Q. And you stopped on core deposit growth.

Speaker 7

I think growth is going to come from existing clients for success on new client account growth. Any color there would be helpful.

Speaker 5

I'm sorry, you're going to have to repeat the question a little bit. It was hard to hear a little bit of that, please.

Speaker 7

Just wondering on the deposit side of the coin, whether you get a sense of just trends in the quarter, what was the drivers of core deposit growth? Can you talk about how it's shaping up early in 3Q? And if you expect growth from existing clients versus whether you're having success attracting new client account growth?

Speaker 5

All right. I'll take a stab at it here. First off, on the non interest bearing, that appears to have leveled off in terms of what we've been seeing trend wise in terms of the decline on the non interest bearing that seems to have reversed itself in June. The growth for the quarter is attributed to core deposit growth as opposed to brokered or institutional deposits. Pricing seems to have, as I pricing seems to have, as I indicated earlier, pricing seems to have flattened out or is basically at the kind of the apex in terms of our own cost of funds.

Speaker 5

And then going forward, as you know, it's difficult to predict deposit growth going forward. But I would venture to say because of what we're doing from a tactical standpoint, new offices and new officers, I would like to think majority of our growth going forward will be from new clients as opposed to existing clients increasing their balances.

Speaker 7

Got it. That's helpful. And then interest bearing demand balances seem to increase pretty meaningfully. Can you just talk about whether that growth is from existing clients or that migration? And just curious what rates are there?

Speaker 5

I'm sorry. I didn't get the question again. I'm sorry. I know it's non interest bearing deposits, so I'm having a hard time hearing you.

Speaker 7

Yes. So interest is this better now?

Speaker 5

Yes.

Speaker 7

All right. Interest bearing demand, deposits, it seemed to increase pretty meaningfully during the quarter. Just curious if that growth is from existing clients or new account growth or whether that was migration. I'm just kind of curious what rates are there relative to the portfolio.

Speaker 5

That's a combination of both. We do see obviously people moving from non interest bearing to interest bearing due to the rate environment. Although that as I said, that migration pattern seems to have slowed down significantly.

Speaker 7

Got it. And then lastly, just on capital priorities and then I'll step back. You've been active repurchasing stock, You increased the dividend this past year. Just curious how you view buybacks in light of your improved currency. I'm just curious your thoughts on further de novo expansion opportunities and just kind of general commentary on capital priorities would be helpful.

Speaker 7

Well,

Speaker 5

as always, it's been the case for us. Our primary focus first on capital allocation is organic growth. 2nd, dividends 3rd, buyback and 4th would be anything from a strategic standpoint, and I don't think that's really changed at this point. The repurchase we did, most of it occurred during latter part of 2023 at an average price of just under $60 With where we're trading at today, we're going to be a lot more circumspect about going forward on the repurchase.

Speaker 2

Hello?

Speaker 5

Are you there?

Speaker 2

Are you there? Hello.

Speaker 7

That's helpful. Thanks for answering my questions. I'll step back.

Operator

Our next question is a follow-up question from Matthew Clark at Piper Sandler. Please go ahead with your follow-up.

Speaker 3

Hey. Just wanted to ask about the net charge offs and how much of that $9,000,000 was related to those 2 C and I loans? It seems like that's where the losses were incurred. I know they were previously reserved against, but just wanted to get a sense for how much of that was tied to those 2 loans? And if you could give us some more color as to the types of credits those are other than being C and I, and kind of what the resolution process looks like?

Speaker 2

Well, the charge offs, roughly $7,500,000 or $9,000,000 related to these the 1 C and I loans, okay? And so basically, that's a charge off for me. Well, I guess another $1,500,000 related to previously resolved real estate loans.

Speaker 3

Okay. But the types of the business, I guess that these the two businesses that these are related to? I'm just trying to get a sense for what types of business these are and

Speaker 2

It's not related to it's a vast, fast difference, these two business.

Speaker 3

Okay. Okay. Sounds good. And then just back on the question about the CD repricing and kind of what's coming up for renewal. Are the renewal rates 5% or that's what they're maturing at?

Speaker 3

I'm trying to get a sense for kind of the differential.

Speaker 5

Yes. No, they're maturing at 5%. And as we see market rates and our offered rates start to come down, that's why I think we're as I said, we're at the apex here.

Speaker 3

And what's your current offering rate? Where are they starting to renew this month?

Speaker 5

Depends on the term. It goes anywhere from the 3s up to 5, but that's a longer term and that's not picked by our clients.

Speaker 3

Okay, sounds good. Thank you.

Operator

And our next question is also a follow-up from Andrew Terrell from Stephens. Please go ahead with your follow-up.

Speaker 4

Hey, thank you. If I could just follow-up again on the C and I charge offs and take another stab. Just can you talk to what specifically drove, I guess, the deteriorating fundamentals of the companies for the loans that you charged off? Just trying to get a better sense of kind of what happened there.

Speaker 3

Well,

Speaker 2

Mick, do you want to take care of that

Speaker 5

question? Yes.

Speaker 8

This to credit actually where there will be there should be some recovery later on because we are waiting for some of the litigation process because one of the loan we have arbitration pretty soon in either Q3 or early part of the first quarter. So the loan fully guaranteed by individual guarantor was a very strong financial conditions. So that's one of them. And the other one also we're doing we do have the judgment of this credit and we're doing post judgment examination at this time. So hopefully for both of them, we can get some recovery from the quarters coming.

Speaker 2

As you can see, we charge off everything. I mean, we have fully reserved everything. Hopefully, that the legal proceeding has produced some results for us.

Speaker 3

Okay. Thanks for the question.

Operator

And ladies and gentlemen, at this time, I'm showing no additional

Speaker 2

Thank you very much. I think that I must speak for many, many, many of our customer our industry's customers that we hope that the finally, there will be rate cuts soon. And personally, I do feel that the Fed has not been proactive in the rate increases. And at least they should learn their lesson to be a little bit proactive on their rate reductions, okay? And I mean so it is only a hope, maybe it's a prayer.

Speaker 2

But I think many of our borrowers deserve to have low interest rate

Speaker 7

now. Thank

Speaker 2

you very much.

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Key Takeaways

  • Preferred Bank reported Q2 net income of $33.6 million (earnings of $2.48 per share) alongside annualized loan growth of 8% and deposit growth of 5%.
  • The bank incurred $9 million in charge-offs—primarily on two fully reserved C&I loans—and saw nonperforming assets rise by $22 million, all of which management believes are adequately reserved or collateral-protected.
  • To reduce asset sensitivity, fixed-rate loans were increased from 11% to approximately 25% of the portfolio, while floating-rate loans declined by about 14%, and 98% of floaters now have interest rate floors.
  • Under a $150 million buyback program, the bank repurchased $72.5 million of stock and paid a $2.80 dividend, lifting tangible common equity by 53 basis points, and is seeking reapproval to repurchase the remaining $77.5 million.
  • June’s net interest margin stood at 3.89% with deposit costs around 4.08%, and management expects upcoming rate cuts to ease funding costs and support future margins.
AI Generated. May Contain Errors.
Earnings Conference Call
Preferred Bank Q2 2024
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