Q3 2021 Preferred Bank Earnings Call

October 21, 2021

[music].

Good day, and welcome to the Preferred Bank third quarter 2021 earnings call. All participants will be in listen-only mode. Should you need assistance. Please signal a conference specialist by pressing the start key followed by zero.

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After today's presentation, there will be an opportunity to ask questions. 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.

Thanks, Jason. Hello, everyone and thank you for joining us to discuss Preferred Bank's financial results for the third quarter ended September 30th 2021. With me today from management are chairman and CEO, Lei Yu, President and Chief Operating Officer, Wellington Chen. Chief Financial Officer, Edward Czajka. Chief Credit Officer, Nick Pi and Deputy Chief operating Officer Johnny Hsu. Management will provide a brief summary.

The third quarter ended September 30th 2021 with me today from management are chairman and CEO, Li Yu, President and Chief Operating Officer, Wellington, Chen Chief Financial Officer, Edward Czajka, Chief Credit Officer, Nick Pi and Deputy Chief operating Officer Johnny to.

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.

Unknown risks uncertainties and other factors relating to preferred banks 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 S. E. C required documents the bank files with the federal deposit insurance Corporation or FDIC.

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. Lei Yu. Please go ahead.

Thank you.

Very much.

Good morning, ladies and gentlemen.

I am very pleased to report our third quarter net income of $26 million or 1 dollar and 77 cents a share. Both are new records of Preferred Bank. Likewise, the return on average assets of 1.8% and return on equity of 18% are also the recent year's highs. This quarter we have experienced significant deposit increases. Quarterly deposits increased nearly $400 million under annualized basis little bit over 33%.

Third quarter net income of $26 million or dollar 77 cents a share.

Both are new records.

Bob refer back.

Likewise.

Return on average assets of one.

8%.

And Reed.

Return on equity of 18%.

I'll also the recent year's highs.

This quarter.

We have <unk>.

Premium was significant deposit increases.

Quarterly deposits increased nearly $400 million on an.

Annualized basis little bit over 33%.

Important thing is that the quality of the deposit growth is good. 70% of the deposit growth in the area of interest-bearing demand deposits. Another 20% is in the area of interest-bearing demand deposits and money market. Deposits cost improve moderately from the previous quarter. And I do expect that the trend will continue moderately to improve in the fourth quarter. Loan for the quarter increased $77 million or 7.1% annualize. This is lower than our previous quarters. And we're looking to all pipelines.

70% of the deposit growth in the area of interest bearing.

Demand deposits another 20% is in the area of interest bearing demand deposits and money market. Okay.

Deposits.

Cost improve.

Improve.

Moderately from the previous quarter.

I do expect that the trend will continue.

Moderator.

Improve in the fourth quarter.

Loan.

For the quarter increased 77 million.

At seven 1%.

<unk> annualize this is lower than our previous quarters.

And we're looking to all.

Pipelines refined that.

We found that this quarter, we originated $260 million of new loans.

Loans yet.

However.

But the $260 million on new loans is in line with previous quarters slightly better. However, the payoff for the quarter increased to $210 million, which is roughly as Bob compared to average $150 million in the previous quarters. [inaudible] moderate it a little bit, and likely to continue to moderate compression, moderately compressed in the coming quarter. The net interest margin come in 3.6%, which is lower than previous quarter.

However, the payoff for the quarter increased to $210 million, which is roughly as Bob compared to.

I reached $150 million.

In the previous quarters.

The only <unk> <unk>.

Moderator, it a little bit, okay, and likely to continue to moderate.

Compression.

Moderator are moderately.

Compressed.

In the coming quarter.

The net interest margin come in 363, 6%, which is lower than previous quarter.

But that was the result of oversized deposit growth. This quarter's bright lies is in the non-interest income we have $1.1 million increase for the quarter largely due to the increased LC fees. Looking ahead, LLC fee likely to be satisfactory in the fourth quarter, but probably will be slightly less than the third quarter. Our operating expense to my personal surprise coming at 30.4%. We started to fill the inflation wage inflation and wage increased pressure. And I guess, the full effect of inflation were gradually short in the later quarters. Our credit quality is stable.

Yeah.

This quarter's bright lies is in the non interest income we have $1 $1 million increase for the quarter largely due to the increased LC fees.

Looking ahead, LLC fee likely to be satisfactory in the fourth quarter, but probably will be slightly less than the third quarter.

Okay.

Our operating expense to my personal surprise coming at 34%, Okay. We started to fill.

Inflation wage inflation and wage increased pressure.

And I guess, the full effect of inflation.

We're gradually show up in the later quarters.

Our credit quality.

Is stable.

No defer payment loans under details yet at this time. PPP loans has been reduced to $605 million. And the nonperforming loans was steady. Together, we had only seven non-performing loans. Two of them. Including two of them are the mortgage product. We are highly encouraged by the third quarter operating results. Under the intensive loan competition environment, which will now get used to. And also amid a slow progress in controlling the Delta virus. And under the inflationary, although it's called transitional but we don't know how long this transition is going to be.

<unk> loans has been reduced to 60.

$5 million.

And our nonperforming loans was steady.

Together, we had only seven non performing loans two of them.

Including two of them the mortgage product.

We are highly encouraged by the third quarter operating results.

Under the intensive.

Loan competition environment, which will now get used to.

And also amid a slow progress.

In controlling the Delta virus.

And under the inflationary, although it's called transitional but.

We don't know how long this transition is going to be.

But I do see all of these facts will gradually improve in the coming days. And we hear the Preferred Bank are quite optimistic about our 2022 year. Thanks. Thank you very much I'm ready for your questions. We will now begin the question and answer session. To ask a question you may press star then one on your touchtone phone.

Improve in the coming days.

And we hear in preferred bank.

Quite optimistic about our 2022 year.

Thanks.

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

We will now begin the question and answer session.

To ask a question you May press Star then one.

Touchtone phone.

If you're using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Matthew Clark from Piper Sandler. Please go ahead.

To withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Our first question comes from Matthew Clark from Piper Sandler.

Please go ahead.

Nick.

Good morning.

Maybe just on the loan growth outlook and the pipeline, it sounds like the production is still very strong. The payoffs are obviously a little disappointing. In some respects what are your thoughts on payoffs going forward? And how would you describe the pipeline? I think last quarter, you mentioned it was satisfactory, but any other kind of additional color as to what you might mean by that would be helpful. Hi. At this point in time, early October I think our pipeline is probably equally if not slightly better. Then the third quarter, which as I indicated third quarter actual pipeline was better than previous quarters. But there are elevated payoff activities. And this low-interest environment is is very prolonged and many people are doing loans at the yield rate less than our net interest margin, but fixed for 10, five or 10 years.

It is still very strong.

The payoffs are obviously a little disappointing.

Appointing.

In some respects what are your thoughts on payoffs going forward.

And how would you describe the pipeline I think last quarter, you mentioned it was satisfactory, but any other kind of additional color as to what you might mean by that would be helpful.

Hi.

At this point in time.

Earlier.

I think our pipeline is probably equally if not slightly better.

Then the third quarter, which.

As I indicated third quarter actual pipeline was better than previous quarters.

But there are elevated.

Payoff activities.

And this low interest rate environment is is very prolonged and many people are doing loans.

At the yield rate less.

Net interest margin, but fixed for 10, five or 10 years.

Which we think will be detrimental to the future. Given the fact that is about two. Two to taper and maybe the lift fall with somewhere. Sometimes close. Close to the site. So the situation, we choose not to compete because of these reasons. So we just want to maintain going forward that our portfolio is not short-sighted. Okay. So. Maybe that elevated payoff activity continues maybe do a little bit better in production. So maybe the growth rate is somewhere in between this quarter and your prior expectations of low double digits or teens mid teens.

Detrimental to the future okay.

Given the fact that <unk> is about two.

Two to taper and maybe the lift fall with somewhere.

Sometimes close.

Tom.

Is it closer to the site.

No.

<unk> the situation, we choose not to compete because of these reasons.

So we just want to maintain.

Going forward that our portfolio is not short sighted.

Okay. So.

Maybe.

Elevated payoff activity continues maybe do a little bit better in production. So maybe the growth rate is somewhere in between.

<unk>.

This quarter end.

Prior expectations of low to.

Low double digits or teens mid teens.

As you probably can guess, it's very hard to predict at this point in time, but with certainly that our cash experiences that were always have grown. We certainly would try to reach the level of previous quarters, will try very hard we'll continue hiring people. Adding staffs, we will continue to move forward looking for new loan opportunities. But somehow the market has to cooperate too. The slowness of Delta control certainly will be a factor affecting the transaction level. Okay great. Our priority is loan growth. Okay. Great and then just the other one for me was on the letters of credit fees.

Our cash experiences that were always.

These have grown okay. We certainly would try to reach the level of previous quarters will try very hard we'll continue hiring people.

Adding staffs, we will continue to move forward looking for new loan opportunities and.

But somehow the market.

Is true.

Two to cooperate to the.

The activity of.

The slogan.

Slowness of the.

Total control certainly will be a factor affecting the transaction level.

Okay great.

And then we work with.

Our priority <unk> loan growth.

Okay, Great and then just the other one for me was on the letters of credit fees.

And the sustainability of that activity is that something you think you can replicate going forward? It was a little outsized. I think the third quarter delivered outsized, but fourth quarter will be better than the second quarter, but probably lower than the third quarter a little bit.

It was a little outsized.

I think third.

Quarter delivered outsized, but fourth quarter will be better than the second quarter, but probably lower than the third quarter a little bit.

Okay, great. Thank you.

Yes.

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

Thanks. Hello.

No.

Quick follow up on the letter of credit fee question that Lee based on kind of your comments.

There is the fourth quarter represent sort of a baseline that you might think about a letter credit fees going?

Kind of a seasonal impact that would diminish going into the first quarter of '22? The nature of letter of credit as we are opening that you earn a fee day. So actually it is there a certain degree of the volatility beauty. But looking at the situation and to the best we can tell the third quarter will be slightly less in the fourth quarter will be. In the quarter and I hope in the first quarter. So far it looks like we'll be closer to the fourth quarter at this time, but obviously, we hope to pick up a few more fees and record more fee income. Okay, and last quarter, I think that you've kind of highlighted pay offs as one of the risks of being an offset to the production.

That would diminish go into the first quarter of 'twenty.

Due to the nature of letter of credit as we are opening that you earn a fee day. So actually it is it is there a certain degree.

Among a certain degree the volatility beauty.

But looking at the situation and to the best we can tell third quarter. It will be slightly less in the fourth quarter will be.

In the quarter and I hope in the first quarter. So far it looks like we'll be closer to the fourth quarter at this time, but obviously, we hope to pick up a few more b is in and we pulled more fee income.

Okay and last quarter, I think that you've kind of highlighted.

Pay offs as one of the risks of.

Being an offset to the production.

More of a transactional oriented bank and I think this quarter, obviously, we saw that. Is there any room on the production side. I think you've talked about some new hires a few quarters ago. Just thoughts on the ability to kind of try to outrun some of the payoffs. Let me put it this way. It's like talking to our shareholders will do the best. The only thing you can say is that looking at our past experiences we're always will be, was trying to put production is one of our priority, but anything at this point in time, the Crystal ball is kind of broken this one time. Payoff doesn't come in with a lot of notice ahead. Suddenly you receive a demand. It is a pay off okay. Sometimes it's quite surprising to us. The payoffs happen, we do our best in the weekly basis trying to update our list of payoffs.

Is there any room.

Production side.

I think you've talked about some new hires.

A few quarters ago.

Just thoughts on the ability to kind of try to outrun some of the payoffs.

Yeah.

Let me put it this way.

It's like talking to them.

Our shareholders will do the best case and.

Only thing you can say is that looking at our past experiences we're always always will be.

Was trying to.

Two to put production is one of our priority, but anything at this point in time, the Crystal ball is kind of.

As onetime payoff doesn't come in with a lot of it.

Notice ahead Youll Kathryn.

Suddenly you receive a demand.

It is a pay off okay.

Sometimes it's quite surprising to us.

Payoffs happen, we do our best in the weekly basis.

To update our list of payoffs.

And we do a weekly basis try to update our pipeline. And that is a bank copied every week. Okay and then. Finally for me looks like you put a couple of hundred million dollars to work. This portfolio during the quarter, but with the deposit flows you mentioned. The cash balances increased by similar amount so. And that's about maybe thinking about putting more of that to work at some shorter term. Yields that might be not as attractive as loan yields but won't. In the rate for that period of time, we're talking about that other banks are doing. Yes. It's a difficult challenge Gary as you can imagine in this rate environment to try to go after yield so we're not going to necessarily do that but yeah, we put about $200 million to work and it's very short monthly Ginnie floaters. So we're not taking.interest rate risks there, we'll probably we may do a little bit more of that but at this point, we don't want to go long in the bond portfolio, so we'd like to lend it out.

And that is a bank copied every week.

Okay and then.

Finally for me looks like you put a couple of hundred million dollars to work.

This portfolio during the quarter, but with the deposits.

Deposit flows you mentioned.

The cash balances increased by similar amount so.

And that's about maybe thinking about putting more of that to work at.

Some shorter term.

Yields that might be not as attractive as loan yields but won't.

In the rate for that period of time, we're talking.

Talking about that other banks are doing.

Yes, it's a.

It's a difficult challenge Gary as you can imagine in this.

This rate environment to try to go after yield so we're not going to necessarily do that but yeah, we put about $200 million to work and it's very short monthly Ginnie floaters. So we're not taking.

Interest rate risks there, we'll probably we may do a little bit more of that but at this point, we don't want to go long in the bond portfolio, so we'd like to lend it out.

As our first option.

And to add on to your previous question regarding hires in production. I think you have already seen within the third quarter production numbers some of the effect of the new hires that we have taken on this year. So we certainly look forward to increasing that as we go forward, but as Mr. Yu said.

I think you have already seen within the third quarter.

Quarter production numbers some of the effect of the new hires that we have taken on this year. So we certainly look forward to increasing that as we go forward, but as Mr. Yu said it's.

It's top priority, we're doing our best. Sorry, if I cut you off earlier, thanks for taking my questions. No worries. The next question comes from Steve Moss from B Riley. Please go ahead. Good morning. Morning. Maybe just on the loan pricing here kind of curious as to what are new money yields are these days? And also loan yields ticked up quarter over quarter. I know, there's a little bit of an uptick in fees. But that doesn't seem to account for the increase in yield quarter over quarter. You had the number right in front of you and yes. So the if you recall. Steve last quarter, we had an interest adjustment downward about to almost $2.3 million sorry, yes.

Sorry, if I cut you off earlier, thanks for taking my questions.

No worries.

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

Good morning.

Morning.

Maybe just on the loan pricing here kind of curious as to what our.

New money yields are these days and also loan yields ticked up quarter over quarter.

Quarter, I know, there's a little bit of an uptick in fees.

But that doesn't seem to account for.

The increase in yield quarter over quarter.

One you had the number right in front of you and yes. So the if you recall.

Steve last quarter, we had an interest adjustment downward about to.

Almost $2 3 million sorry, yes.

Yes that was the driver, but overall loan yields excluding that just looking at that a few minutes ago, overall loan yields are holding up fairly well, the challenge with the margin as the rest of the earning assets and the cash that we have. Right. Okay, and then in terms of the yield on the Ginnie Mae as you guys put on just kind. I'm curious, what's the word there? I'm going to ask that question in public. 45 basis points. Okay. And what's the appetite I mean, you're sitting on call it over 1 billion in cash. In terms of adding more in the upcoming quarter. How are you thinking about that in the short term? We would obviously try to deploy that but we have to wait in the interest trends going forward on the whole situation. Also we as the operator must be cognizant about Wednesday to pruning. Capex, and once sort of like I wouldn't say tightening or normalization happening. Would be higher liquidity that every bank is having.

Right, Okay, and then in terms of the yield on the Ginnie Mae as you guys put on just kind.

I'm curious, what's the right there.

I'm going to ask that question in public.

45 basis points.

Okay.

And what's the appetite I mean, you're sitting on call it over 1 billion in cash.

In terms of.

Yeah.

Adding more in the upcoming quarter.

How do we how are you thinking about that in the short term.

We would obviously try to deploy that but we have to wait in the interest interest rate.

Trends going forward on the whole situation.

And.

Also we as the operator must be cognizant about Wednesday to pruning.

Capex in a Wednesday sort of like I wouldn't say tightening or normalization happening.

Would be.

Higher liquidity that <unk> bank is heading.

We will be holding our some of them will be going away. So we just have to be careful about these items. Some of the items is precautionary and so I mean some of the situation we are doing is really really preventative medicine. So it's not a going to be we can I'm not going to be chasing the last dollars and risk at these kind of that nature. Okay. Karen obviously consistently you guys about in the past and I guess, maybe just in terms of expenses here. Mr. You talked a little bit about inflationary pressures just kind of curious as to how you guys are thinking about expenses for the fourth quarter and maybe a little. A little bit into 2022.

So we just have to be careful about these items somebody item is.

Is is precautionary and so so I mean some of the situation. We are doing is really really preventative medicine. So it's not a going to be we can I'm not going to be chasing the last dollars and risk.

At these kind of that nature.

Okay.

Karen obviously consistently you guys about in the past and I guess, maybe just in terms of expenses here. Mr. You talked a little bit about inflationary pressures just kind of curious as to how you guys are thinking about expenses for the fourth quarter and maybe a little.

A little bit into 2022.

Well, Mike answer is going to be higher but it has a different player maybe.

No.

I agree with you this time.

Though they will likely be higher the sub 15, four this quarter I think was pretty good given the environment that we're in but.

Clearly, as we go forward wage pressure will continue to weigh on expenses. So they will likely increase incrementally going forward, Steve wage pressure is that when people start to take care of people away with the height. I mean, the offer and then and then the new hires coming in at a level higher.

I mean, the offer and then and then the new hires coming in at a level higher.

Hugh.

We are as we are forced to somewhere along the line, making adjustment to all the staff. Okay. So these things as we go forward will make rational adjustment only reflects on the on the expense level all [inaudible] and I think every bank will face that kind of pressure. Okay. Alright, well, thank you very much for all that. Yes. Again, if you have a question. Please press star then one. The next question is from Andrew <unk> from Stephens. Please go ahead.

Ill, just Hong Kong fruit forward and I think every bank.

Faith.

That kind of pressure.

Okay.

Alright, well, thank you very much for all that.

Yes.

Again, if you have a question. Please press Star then one.

The next question is from Andrew <unk> from Stephens. Please go ahead.

Hey, good morning. Morning. And I was hoping maybe we could get an update on how business is turning over in Texas with your Houston Office. Are they still on track to kind of it. I think it was $150 million of outstandings by the middle of next year and then outside of that. Any thoughts on maybe kind of new market expansion opportunities at this point? Well. Why don't I, unless you want to add I answer that first okay. Okay. We have some turnover in the Houston. The leader of the offset of the team, which not a producer. More or less the thinking there. Has chosen to take and there is a position with another bank. So following him as one of the two other producers.

Morning.

And I was hoping maybe we could get on.

Get an update on that.

This is turning over in Texas with your Houston.

Office.

Thanks to all on track to kind of it.

I think it was $150 million of Outstandings by the middle of next year and then outside of that.

Any thoughts on maybe kind.

Of new market expansion opportunities at this point.

Well.

Why don't I, unless you want to add I answer that first okay. Okay.

We have some.

Turnover in the Houston.

The leader of the offset of the team, which not a producer.

More or less the thinking there.

Price.

<unk> has chosen to take and there is a position.

The bank Okay. So so.

Following him as one of the one or two other producers.

Right now we have three loan staff at this point of time in Houston, They continue producing. The total level of expectation in the next six months is moderated down. But still will be very much in line with the with the, as they'd go expenses are payroll related to that. We are currently hiring. And looking for new staff to beef up the Houston operation. Okay. So when the new staff coming along. It would be reaccelerated.. So I don't have anything to add. No, I think you covered basically. Just you mentioned that the loan pipeline in Houston.

Producing okay.

Total level of expectation in the next six months is moderated down.

<unk> will be very much in line with the with the with the Whiskey is they'd go expenses are payroll related to that we are currently hiring.

And looking for new.

New staff to beef up the Houston operation Okay.

So when the new staff coming along.

It would be reaccelerate. It okay. So I don't have anything to add.

No I think you covered basically in.

<unk>.

Just you mentioned that the loan pipeline.

And it still looks pretty robust. Have a pretty good inventory going. And.

Have a pretty good inventory going.

And.

People are they are holding.

For and holding the production.

Okay. Thanks.

Thoughts on kind of potential kind of new market.

Expansion.

We are working on it.

While we cannot say anything until we're successful items some team of people.

Okay.

I think the valuation of shares has kind of improved a bad relative to where you were repurchasing at.

During the third quarter any kind of change in appetite for buybacks moving forward or should we still expect share repurchases.

Yeah.

Well, Ed do you want to report on that sure.

Andrew we have in place with the repurchase plan is a hard cap a hard ceiling.

C $5 a share.

And so we ran into that around mid to late September and so we are not terminated but we've have not been active in the market since that time.

Obviously that if our share continues to improve we.

We will go to the board and seeking.

A successful approval to increase the limit on the whole situation.

Given that.

The ability to generate.

Earnings and beef up.

Our capital level and.

Additional.

The fund as it should be tricky.

For their returns to capital account easily.

Understood. Okay. Thank you.

Mr. <unk>, how are you feeling about the reserve at around one 4% today and do you think there's kind.

Further room to work that down or are you comfortable with where it's at today.

I can only answer.

This thing and then I have a Nick answered that level later.

First of all is that if you if you remember the pre pandemic level, okay. The CSO day after the seasonal conversion our level at $1 15.

Okay. So.

Last year I think the banking.

So actually we have been very prudent.

Putting a whole lot of reserve on that situation.

So many of the factors that depend on each each bank's viewpoint hasnt.

It's different but everybody has started to recognize improved economic conditions.

So.

And as anybody's model and seasonal model.

And on the economic conditions.

No.

When it will return back to the pre seasonal seasonal lift.

Pre season.

They have to see some level, we do not know, but I think its credit quality host Debbie if the economy does.

If you wait one day.

Get to that level.

Anything to add toy alcohol misuse comment.

This is the improvement in all economic conditions related to our seasonal forecast.

As far as.

Uh huh.

That'd be qualitative side.

We.

We tentatively believe that there will be a somewhat less stress.

The reserve requirement in the future quarters, However, definitely as Mr. Yu mentioned different.

It also depending on lots of moving factors such as loan growth.

The migration of the credit quality.

So GDP unemployment rates.

This is Josh etcetera, as such certainty of pindan right.

So definitely there is our best guesstimate for the Lora, our reserves should be gradually.

Reduced to around.

One point.

3% level plus minus depends on also some moving factors so hard to see how are we going to handle this during the next few quarters is eventually will be in that range.

Understood Okay.

Thank you for taking my questions.

There are no more questions in the queue. This concludes our question and answer session.

To turn the conference back over to Li Yu for any closing remarks.

Well, thank you very much for interest in that.

In the bank.

We.

Appreciate your support.

And.

Ill.

Okay.

<unk>.

We are not looking.

Now looking for.

No.

For a home running every every segment of our operations, but we do look for overall.

Above.

MH.

But that's indeed high performing category Okay.

So we'll continue.

Our effort toward that direction.

Thank you.

The conference has now concluded thank you for attending.

<unk> presentation, you may now disconnect.

[music].

Today's.

[music].

Good day and welcome to the preferred bank third quarter 2021 earnings call.

All participants will be in listen only mode.

Should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions. 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.

Thanks, Jason Hello, everyone and thank.

You for joining us to discuss preferred bank's financial results for the third quarter ended September 32021 with me today from management are chairman and CEO, Li Yu, President and Chief Operating Officer, Wellington, Chen Chief Financial Officer, Edward Czajka, Chief Credit Officer, Nick Pi and Deputy Chief Operating Officer Johnny.

Johnny to.

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 banks 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 S. E C required documents the bank files.

With the federal deposit insurance Corporation or FDIC.

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.

All over to Mr. Li Yu. Please go ahead.

Thank you very much.

Good morning, ladies and gentlemen.

I am very pleased to report.

Third quarter net income of $26 million or dollar 77 cents a share.

Those are new.

Our records.

For preferred bank.

Likewise.

Okay.

Return on average assets of 1.18%.

And we.

Return on equity of 18%.

Also the recent year's highs.

Okay.

This quarter, we have experienced significant deposit increases.

Quarterly deposits increased nearly $400 million.

On the annualized basis, a little bit over 33%.

Import.

Important thing is that the quality of the deposit growth is good.

70% of the deposit growth in the area named interest bearing.

Demand deposits another 20% is in the air.

Area of interest bearing demand deposit and money market okay.

Deposits costs improve.

Improve.

Moderately from the previous quarter.

I do expect that the trend will continue.

Moderator.

Improve in the fourth quarter.

Loan.

For the quarter increased $77 million or 7.1% annualize this is lower than our previous quarters.

And we're looking to all.

Pipelines, but found that.

This quarter we originated.

$216 million of new loans.

However.

Although the 260 million on new loans is in line with previous quarters slightly better.

However, the pay off for the quarter increased to $210 million okay.

Which is roughly about compared to average $150 million.

In the previous quarters.

Okay.

Lonely here.

Moderated a little bit okay.

And likely to continue to moderate.

I mean the compression.

Moderator are moderately compressed.

In the coming quarter.

The net interest margin come in $3, 636%, which is lower than previous quarter.

But that was the result of oversized deposit growth.

Yeah.

This quarter's bright lies is in the non interest income we had $1 $1 million increase for the quarter largely due to the increased LC fees.

Looking ahead, LC fee likely to be satisfactory in the fourth quarter.

But it will be slightly less than the third quarter.

Our operating expense to my personal surprise coming at 34%.

We started to feel the.

Inflation wage inflation and wage increased pressure.

And I guess, the full effect of inflation, we're gradually show up in the later quarters.

Our credit quality.

Is stable.

There are no defer payment loans.

Sales yet at this time.

PPP loans has been reduced to 60.

$5 million.

And the nonperforming loans was steady.

Altogether, we had only seven nonperforming loans two of them.

Another thing to have them on the mortgage product.

We are highly encouraged by the third quarter operating results.

Under the intensive.

Loan competition environment, which will now get used to.

And also amid a slow progress in controlling the delta virus today.

And under the inflationary, although its core trailer transitional but.

We don't know how long this transition is going to be.

But I do see all of these facts will gradually.

Improve in the coming days and weeks here in preferred bank.

Quite optimistic about our 2022 year.

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

We will now begin the question and answer session tasks.

The question you May Press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Okay.

Our first question comes from.

Kathleen Matthew Clark from Piper Sandler. Please go ahead.

Hey.

Good morning.

One one.

Maybe just on the loan growth outlook and the pipeline it sounds like the production.

It's still very strong.

Payoffs are obviously a little disappointing.

In some respects what are your thoughts on payoffs going forward.

And how would you describe the pipeline I think last quarter, you mentioned it was satisfactory, but any other kind of additional color as to what you might mean by that would be helpful.

Hi.

At this point in time.

Early October.

Think our pipeline is probably equally if not slightly better.

Then the third quarter, which.

As I indicated third quarter actual pipeline was.

Better than previous quarters.

But the elevated lapping.

<unk> activities.

And this low interest rate environment is very prolonged and many people are doing loans.

At the yield rate less.

Net interest margin, but fixed for 10, five or 10 years, which we think will be.

Payoffs them into the future given.

Given the fact that <unk> is about two.

Two to taper and maybe the lift off.

Sometimes close.

From a farmer is closer to the site.

No.

Maybe you have a situation we choose not to compete.

Because of these reasons.

So we just want to maintain.

Going forward that our portfolio is not short sighted.

Okay. So.

You know maybe that that elevated payoff activity continues maybe do a little bit better in production.

Maybe the growth rate is somewhere in between this quarter and.

Our prior expectations of kind of load.

Low double digits or teens mid teens.

As you probably can guess, it's very hard to predict at this point in time, but with certainly that.

<unk>.

<unk>, so cash experiences that we always have growth. Okay. We certainly would try to reach the level of previous quarters will try very hard. Okay. We'll continue hiring people, adding staffs, we will continue to move forward looking for new loan opportunities and.

But.

Somehow the market has true.

Two to cooperate to the.

The activity of.

The slogan.

Slowness of.

Total control certainly will be a factor affecting the transaction level.

But.

Okay.

And then we work.

Our priority to loan growth.

Yeah, Okay, Great and then just the other one for me was on the letters of credit fees and the sustainability of that activity is that something you think you can replicate going forward or do you feel like it was a little outsized.

I think.

Orders, a little outsized, but fourth quarter will be better than the second quarter, but probably lower than the third quarter a little bit.

Okay, great. Thank you.

Okay.

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

Thanks Hello.

Quick follow up on the letter of credit fee question that lead based on kind of your comments.

There is the fourth quarter represent sort of a baseline that you might think about a letter credit fees going.

Kind of a seasonal impact.

Would diminish.

First quarter according to the.

The nature of a letter of credit as we opened eight that you earn a fee. So actually it is it is there a certain degree.

Among a certain degree the volatility beauty.

But looking at the situation.

To the best we can tell third quarter it will be.

Probably less in the fourth quarter will be slightly in the quarter and I hoped in the first quarter. So far it looks like we'll be closer to <unk>.

Fourth quarter at this time, but obviously, we hope to pick up a few more deals and we pulled more fee income.

Okay, and less last quarter I think.

Slide kind of highlighted.

Payoffs as one of the risks.

Being an offset to the production.

It's more of a transactional oriented bank and I think this quarter, obviously, we saw that.

Is there any room.

Production side.

You've talked about some new hires a few quarters ago.

Just thoughts on the ability to kind of try to outrun some of the payoffs.

Yeah.

[noise].

Let me put it this way.

Uh huh.

I think it's like talking to them to our shareholders. We would do the best case and.

The only thing you can say that looking at our past experiences. We're always always was trying to.

To put production is one of our top priority, but anything at this point.

The Crystal ball is kind of mercury to disappoint payoff doesn't come in with a lot of it.

Notice ahead Youll Kathryn.

Suddenly you receive a demand.

It is a pay off okay. So sometimes it's quite surprising to us that.

The payoffs happen, we do our best in the week.

Weekly basis.

To update our list of payoffs.

And we do a weekly basis try to update our pipeline.

And that is a bank copied every week.

Okay and then.

Finally for me it looks like you put a couple of hundred million dollars to work.

I'm, just curious portfolio during the quarter, but with the deposit flows you mentioned.

The cash balances increased by similar amount so.

And that's about maybe thinking about putting more of that to work at.

Some shorter term.

Yields that might be not as attractive as loan yields but won't.

<unk>.

In the rate for that period of time, we're talking about what other banks are doing.

Yes.

It's a difficult challenge Gary as you can imagine in this.

Rate environment to try to go after yield so we're not going to necessarily do that but yes, we put about $200 million to work and it's very short monthly Ginnie.

Floaters, so we're not taking interest rate risk there, we'll probably we may do a little bit more of that but at this point, we don't want to go long in the bond portfolio, but we'd like to blend it out as as our first option.

To add on to your previous question regarding hires in production.

I think you have.

<unk> already seen within the third quarter production numbers some of the effect of the new hires that we have taken on this year. So we certainly look forward to increasing that as we go forward, but as Mr. <unk> said its.

It's top priority, we're doing our best.

Yes, sorry, I had if I cut you off earlier, thanks for taking.

All my questions.

Worse.

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

Good morning.

Morning.

Maybe just on the loan pricing here kind of curious as to what our.

New money yields are these days and also.

Loan yields ticked up quarter over quarter, I know, there's a little bit of an uptick in fees.

But that doesn't seem to account for.

The increase in yield quarter over quarter.

One you had the number right in front of you and yes. So the if you recall.

Steve last quarter, we had an interest adjustment downward about to almost $2.

3 million sorry, yes.

Yes that was the driver, but overall loan yields excluding that just looking at that a few minutes ago overall loan yields are holding up fairly well the challenge with the margin as the rest of the earning assets and the cash that we have.

Right, Okay, and then in terms.

But on the Ginnie Mae's you guys put on just kind of curious what's the right there.

If you're going to ask that question in Buffalo.

45 basis points.

Uh huh.

Okay.

And whats the appetite I mean, you're sitting on call it over 1 billion in cash.

In terms of.

<unk> of the year.

Adding more in the upcoming quarter.

How do we how youre thinking about that in the short term.

We would obviously try to deploy that but we have to.

And the interest interest rate.

Trends going forward on the.

<unk> cash and also we as the operator must be cognizant about once the tapering.

Captains Wednesday sort of like I wouldn't say tightened make more normalization happening.

Will do.

Higher liquidity the Everbank as February we'll be holding off.

Some of them will be going away.

So we just have to be careful about these items somebody either.

Is is precautionary and so so I mean, some of the situation. We're doing a really really preventative medicine. So it's not going to be we're going to not going to be chasing the last.

Wholesalers and risk at these kind of that nature.

Okay.

Karen obviously consistently you guys have done in the past and I guess, maybe just in terms of expenses here I missed when you talked a little bit about inflationary pressures just kind of curious as to how you guys are thinking.

How about expenses.

The out of the fourth quarter, and maybe a little little bit into 2022.

Well my guess is going to be higher, but <unk> has a different financing maybe.

No.

I agree with you this time.

Though they will likely be higher the sub 15, four this quarter I think it was pretty good given the.

Hence experiment that we're in but clearly as we go forward wage pressure will continue to weigh on expenses. So they will likely increase incrementally going forward, Steve wage pressure that when you people start to take care of people away with a higher offer and then and then the new.

And by coming in at the level of higher U.

As we are forced to somewhere along the line, making adjustment thoughtful all the staff. Okay. So these things as we go forward.

Rational adjustment only reflects on the on the expense level all.

<unk> going forward.

And I think every bank what's safe.

That kind of pressure.

Okay.

Alright, well, thank you very much for all that.

Yes.

Again, if you have a question. Please press Star then one.

The next question is from Andrew <unk> from Stephens. Please go ahead.

Hey, good morning.

I was hoping maybe we could get.

We get an update on how business is turning over in Texas with your Houston Houston Office are things still on track to kind of hit.

I think it was a $150 million of Outstandings by the middle of next year and then outside of that.

Any thoughts on maybe kind of new market expansion opportunities at this point.

Well.

Why don't you want to add I'll answer that first okay. Okay.

We have some.

Turnover in the Houston.

The leader of the offset of the team which.

Any amount of produce more or less a big endeavor.

Pat has chosen to take and there is a position with another bank. Okay. So so.

Following the same as the one on one or two other producers right now have three loan staff at this point of time in Houston.

We are continuing to produce at the total level of expectation in the next six months is moderated down but still will be very much in line with the with the wish list.

<unk> expenses are payroll related to that we are currently hiring.

And looking for new staff to beef up the Houston operation Okay.

One of the new staff coming along.

It will be re accelerated.

Well I don't have anything to add.

No I think you covered basically in gist.

Just you mentioned.

Loan pipeline on Houston.

No.

It's pretty robust.

Pretty good inventory.

And.

People are they are holding.

Org and holding the production.

Okay, Thanks, and any thoughts on kind of.

That all kind of new market expansion.

We are working on it.

But we cannot say anything until we're successful lettings some team of people.

Okay.

I think the valuation of shares has kind of improved a bad relative to where you were repurchase.

Interesting.

During the third quarter any kind of change in appetite for buybacks going forward or should we still expect share repurchases.

Well, Ed do you want to report on that sure.

Andrew we have in place with the repurchase plan is a hard cap.

A hard ceiling of $65 a share.

And so we ran into that around mid to late September and so we are not.

But we have not been active in the market since that time.

Obviously that if I'll share continued to improve.

We will go to the.

<unk> been seeking for their approval to increase the limit on the whole situation.

Given that.

The ability to generate earnings and beef up.

Our capital level and.

Additional.

The fund as it should.

The board should be it should be.

We plan to capital account easily.

Understood. Okay. Thank you.

Mr. <unk>, how are you feeling about the reserve at around one 4% today do you think there's further room to work is down or are you comfortable with where it's at today.

<unk> I can only answer in this thing and then I have answered that level. Later first of all is that if you. If you remember the pre pandemic level the.

<unk> day after the seasonal conversion our level at $1 50.

Okay.

No.

Last year I think.

The banking industry has been very prudent in putting a whole lot of reserve on lockdown situations. So many of the factors that depend on each each bank's viewpoint hasnt.

It's typically when everybody started to recognize improved economic conditions.

So.

So everybody's model and seasonal model is.

Economic conditions.

So.

When it would return back to the pre seasonal seasonal lift.

Pre season.

You said.

After seasonal level, we do not know.

Think its credit quality host Debbie.

If the economy does not deteriorate.

One day, we get to that level.

Anything to add alcohol misuse comment.

This is the improvement in all economic conditions related to see silver forecast.

This is louis.

Yes.

The qualitative side.

We tentatively believe that it will be somewhat less stress on.

The reserve requirement in the future.

Two quarters, however, definitely esteemed Mr Yu mentioned different.

Wholesale depending on lots of moving factors.

Such as loan growth.

<unk> credit quality and also GTI employment rates.

Centralize such circumstance pindan right.

So definitely it is our best guesstimate for the Lora.

Our reserves should be gradually.

It.

<unk> to around.

One point.

3% level plus minus depends on also some moving factors so hard to see how are we going to handle this during the next few quarters eventually Bob in that range.

Understood Okay.

Thank you for taking my questions.

There are no more questions in the queue. This concludes our question and answer session I would like to turn the conference back over to Li Yu for any closing remarks.

Well, thank you very much for interest in that.

Sure.

<unk> and <unk>.

We are.

I appreciate your support.

<unk>.

No.

Okay.

We're not looking back.

<unk> not looking for.

<unk> will fall for a homerun every segment of our operations, but we do look for overall.

<unk>.

Above average.

But thats in the high performing category Okay.

So we'll continue.

Our effort towards that direction.

Thank you.

The conference has now concluded.

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