Q4 2021 Preferred Bank Earnings Call
[music].
Hello, and welcome to the preferred bank fourth quarter and full year 2021 earnings conference call.
All participants will be in listen only mode.
Should you need assistance. Please see the all conference specialist by pressing the star can you followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two.
Please note today's event is being recorded.
I like to turn the conference over to Jeff Haas off at financial profiles. Mr. Horst. Please go ahead.
Thank you Keith Hello, everyone and thank you for joining us to discuss preferred banks financial results for the fourth quarter ended December 31, 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 Sue 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 at the bank files with.
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.
<unk>. Please go ahead.
Thank you very much.
Good morning, everyone.
I am very pleased to report.
Preferred bank's fourth quarter net income was 26 million.
80 cents a share.
And our full year earnings.
95 million or $6 41.
Sure.
The pre tax pre provision revenue PTP.
Together with total assets.
Together with total loans total deposits all of these are bank records.
In the fourth quarter.
Loan growth was two 9% sequentially and the annual loan growth was 10, 5%.
Sam.
We had a very very active quarter.
Total loan production, we generated $587 million of total commitment with $456 million outstanding.
Which.
Double as prior quarters.
Production.
Unfortunately pay off also more than doubled prior.
Prior quarters at $333 million.
For the full year.
We originated $1 $7 billion of new commitments with $1 two six outstanding.
Ann.
However, again.
800.
$90 million.
Sure.
Looking ahead.
We had a decent <unk>.
Pipeline as of now.
The pay offs, we remain wildcards.
So.
I personally am very comfortable with.
Our staffs.
The ability to originate new loans.
C preferred bank is a custom loan shop.
Much of our production depends on a one on one contact with the customer face to face.
The pandemic is take much of that away from us.
And I believe going forward with.
As the economy gradually easing of getting better and.
And then getting easy that.
We should be reasonably optimistic.
Our production level.
No.
Although.
It could be lumpy between quarters.
Deposit side.
We have little deposit growth in the fourth quarter by <unk> 17.
$6 million at nearly $800 million.
It is very comforting that most of these growth and 90% of it is.
Transactional assignment lower cost.
Our net interest margin.
Was lower than the previous quarter.
It was mainly because of the changes in assets.
Leverage.
As a lonely it remained pretty stable between quarters.
Looking ahead okay.
As we have at 85%.
Of the loans.
Floating.
Should work well.
In a rate rising.
Environment.
One good news to us is that.
And asset quality side.
<unk> from $9 $2 million resolution and the $23 million that I mentioned.
Press release.
On our way to advance another loan of.
Over $4 million to the.
From the NPL level to the yield level that can be sold.
Shortly after and also we're looking to resolve.
Another $4 million of loans.
Which will be paid in full.
<unk>.
As we can see right now so by the end of first quarter I hope.
Our loan quality would be even better than the fourth quarter.
Full year 2022.
Obviously, we still have challenges.
The Ana Paula.
It's hard to predict.
When the pandemic will be easing up on us.
And also with the challenge of.
A high inflation.
Economy.
Which.
I guess, it's taking time to quiet down okay.
We are confident that.
Country, what eventually dealing with these issues.
Right.
But our job is.
<unk> get off shelf as well prepared as possible.
And then b.
Hi, Robert every step along the way.
So I. Thank you very much I'm ready for your questions.
Thank you at this time, we'll begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speaker phone please pick up the handset before pressing the keys to withdraw the question. Please press Star then two at this time, we will pause momentarily to assemble the roster.
And the first question comes from Matthew Clark with Piper Sandler.
Hey.
Good morning.
Good morning.
Maybe just starting on expenses.
Nice.
Decline in comp expense this quarter.
But you also had some cautious commentary in the release around inflation.
More specifically wage inflation I would think.
What's your thought there on the on the run rate Ed in and just overall kind of expense growth for the year.
Well, Ed yes, so yes so.
Fourth quarter was good in terms of expense control Matthew we would expect going forward as you know.
First quarter is always a little bit of a headwind for us on the noninterest expense side due to the payout of incentive compensation, but comparing linked quarters from Q3 to Q4.
Incentive compensation expense was lower in Q4.
Then the capitalized loan costs were higher in Q4, and as you know thats a credit to salary expense, because we credit our capitalized loan costs and amortize them over the life of the loan.
In terms of the first quarter run rates My guess Matthew would be anywhere between 15, 2% 15, 5%.
Okay, and do you think it trails off.
Like it has done historically.
For the balance of the year.
That remains to be seen the big wildcard there Matthew as you already touched on it is on the compensation side, specifically for us recruiting.
We're successful in recruiting in the first couple of quarters of the year, you likely will not see that trail off however, if not you probably will see a trail off a little bit.
<unk>, we're not terribly subject to inflationary pressures as it relates to noninterest expense with the exception of salaries and a few other items.
Got it okay.
And then just on.
The loan pipeline.
The loan pipeline I think Mr. Yu said, it's decent.
When you think about or when you look at the pipeline you think about the year ahead is that still enough to get you to high single digits to low double digits or should we think about something.
The first one.
And then.
Add on to it okay.
Hi, Matt This is Wellington I think the pipeline.
Deason to robust.
I believe so.
Especially with the <unk>.
We continue to.
Have a strategic target too.
Higher new relationship manager.
Looking at the pattern from last year.
Our new region, and a new hire that we brought in.
Yes.
They have worked out very well the big wildcard as Mr. Yu mentioned is to run off.
So we just have to run faster than the runoff.
That's the wildcard.
Matt.
Matt as I said.
One thing I'm relying upon.
Our staff's capability.
We did originate $1 $7 billion in total new commitments.
In 2021.
So which is a very high number considering our total loan size. So so.
None of us have a crystal ball, saying, how much will be in that.
I just feel that the economy is getting better and we should be hopefully we should be doing better.
Great and then just on the.
On the margin outlook.
The remix knowing the.
Loan growth was weighted towards the end of the quarter.
Would it be fair to assume you see.
That remix benefiting the margin in the upcoming quarter and then can you give us some more color behind the loan pricing thats held up pretty well here and the source of the commercial real estate growth.
Types of properties, you guys are being able to finance of late.
I will give you the loan pricing inflammation.
And is giving you the movement of the of the model.
Margin situations.
Actually.
Yes.
Actually that.
Yes.
Hello, Hello, we got some background Hello.
Ed.
Below for the whole year, the new loan.
Made it anywhere from 50 basis points to 100 basis points.
Less than the loan being paid off.
It is it is higher in the beginning of the year.
Caused by through the year, it's narrowed down to about roughly 50 basis points and I have reason to believe the first quarter.
Pay off.
Differences will be more narrow narrowed further okay and this is a national trend and this trend the interest rate environment. This is a trend of competition.
All banking if you'd have a portfolio you do nothing about it year to continuously go down because of payoffs or whatever.
So so we tried to do is generate enough new loans.
Okay.
And hopefully to bring up to total net interest income due to the to the level that is what is reasonable for our shareholders.
So youre going to add yeah in terms of the margin. We ended the year in the last quarter at $3 28, and as we talked about a lot of that is due to the deleveraging effect during the quarter with the preponderance of the loan growth occurring in the latter part of the quarter and the deposit growth.
Going on throughout the quarter Deleveraged the balance sheet, so that led to the another decline in the margin. So that said going forward, we would expect with a higher earning asset base certainly we expect net interest income to grow and Thats, what we really focus on in terms of the margin or mathematical output I would say, it's going to be probably.
Flat to just slightly expanding a little bit in Q1.
Great. Thank you.
Thank you.
Thank you and the next question comes from Andrew <unk> with Stephens.
Hey, good morning.
Hi, Andrew.
Great.
And I appreciate the guide on expenses, it's really helpful. Maybe just thinking about it more holistically.
<unk> expenses normalized a bit higher to start the year and maybe stand out throughout the year.
Also have an improving rate backdrop, and you're clearly very asset sensitive just taking kind of those two pieces. Together is there any reason we shouldnt I guess, we shouldn't think that you can manage the efficiency ratio kind of at or below that 30% level kind of like we saw this quarter.
Well, yes, 28, eight kind of surpassed our even our own expectations, Andrew but I don't see any reason why we cant keep that in the low thirty's that should that shouldnt be a problem at all.
And I just.
I have to add on this case you see.
Efficiency ratio is a function of net interest income, okay, and when the when the rates if it doesn't meet rising environment. The net interest income is likely to increase.
With expensive less.
Less and less.
Sure.
Less of a movement in the interest income so likely that we can maintain that efficiency ratio.
Okay, Thanks, and yes, clearly impressive at 28.
Okay.
Could you guys, maybe provide us an update on how progress is going for the Houston, Houston, Texas LPL.
Okay do you want to update Houston.
Houston update we have.
We have in terms of head counts right now we have three three individuals.
And we're looking to hire.
Three more coming on board towards the end of this month so.
I think with that in mind, we always again, our mentality is always looking for productive relationship manager.
While we consider variable costs that can bring in business. So it's all going the right direction Houston under the leadership of our veterans. So we feel optimistic.
And I also want to add on a little bit from a more strategic point of view, okay from the view of our board of directors Houston is a diversification. It is a very small percentage of our total.
That can staff.
Our small loan portfolio and also we have always been careful when you go into new market.
You don't want to expose approves of growth.
For whatever.
Whatever reason it is one of the reasons from our Chief Credit Officer.
That.
You don't want to have a full set of growth in the new market. So we will we will.
We'll be actively growing the Houston office, because thats, a good market and to bet is that.
Is that the pandemic change.
Capability of visiting the offices.
For the office. So this is growing this steel.
According to our plan pretty much along with our plan, yes, Andrew.
Andrew just to add onto that they finished the year ahead of our expectations and that's a very inexpensive piece of real estate to operate as well. So we feel good about it.
Great Okay.
I appreciate it.
That's it for me. Thank you for taking my questions and congrats on a good quarter.
Thank you.
Yes.
Thank you and the next question comes from Gary Tenner with D. A Davidson.
Thanks, Good morning.
I had a follow up on kind of the expense got it Ed for the first quarter 15, two to 15 five if we look at it kind of year over year. That's in line if not below what the first quarter of 2021 months, Mike I'm, just wondering as you think about kind.
Kind of commentary on wage inflation and everything we're hearing.
In the economy in general here why that would be the case.
I'm just wondering is it as it related to that related to the capitalized cost of.
Benefit.
Increased production potentially this quarter versus where it was first quarter of 'twenty, one or something else yes.
That's part of it Gary the other thing we did is we accrued some of the payroll taxes that are going to be coming due in February when we pay out the annual incentive compensation.
Our payroll tax expense does go up so we did accrue some of that.
In the year 2021, so that's why you won't see that quite as high.
Yeah.
In addition to that in addition to that FDIC premiums, it's actually come down for the bank as.
As our risk profile risk profile has improved.
Relative to <unk>.
Nonperforming assets.
Also first quarter only.
<unk> been quiet rate raises to our staff will.
It would be beginning of March.
So it's not immediately.
<unk>.
Big impact.
Okay. Okay. That's helpful. And then the second question I had just on the fee side third quarter, you had a really significant.
Stronger quarter on letter credit fees.
You talked about fourth quarter being lower but it was kind of below where it was even in the first half of the year or so.
In terms of as you're looking out to 2022, knowing that theres going be some volatility probably in that line item. How are you thinking about that line of business today versus maybe how are you thinking about it.
When we talk in October .
Anybody who wants to answer that.
Why do you think you want to answer that.
Yes, Gary.
On the letter of credit fee side I think we.
We should do so.
Or probably will be greater than what we did in 2021.
Jack.
<unk>.
I think we have to offer.
Sure.
<unk> already.
Connected.
So that's something we would do.
On the other type of servers deposit service and Thats something that we believe in our forecast.
We will surpass at 2021.
In addition, Gary Thanks Wellington in addition.
Service charges on deposits continually increases and that doesn't get a lot of notice because it's not a big line item, but year over year service charges increased 30% and that's due to a number of programs that we began internally.
In order to take advantage of the larger DDA base that we have.
Alright, thank you.
Thank you and the next question comes from Steve Moss with B Riley Securities.
Good morning.
Good morning, maybe just starting with.
Maybe just start with talking back to loan yields were relatively stable quarter over quarter.
Mr. You I heard you talk about pricing coming down I'm, just kind of curious where theyre just any unusual.
Fees are extra fees in it.
The loan yield this quarter.
Well.
No as a matter of fact, I think we actually had.
A small reversal of interest income of about $60000 on a couple of loans. So there's been nothing.
Unusual in the interest income on loans and as a matter of fact to take that a step further Steve.
Looking at <unk>.
Loan yields over the past five quarters.
Over the past four quarters, our average loan yield is only down 12 basis points.
This backdrop.
Okay.
After the strong deposit growth.
Hey.
And twice the amount of the loan growth and also the pattern of deposit growth and loan growth change.
Changes.
<unk>.
Net interest margin quarter.
Quarter by quarter, but again that.
As I've said that.
We spend much more time.
For the immediate interest income okay.
Right.
Okay, and maybe just sticking with the inputs to the margin just kind of curious we've had a move up in rates here what is your appetite for any additional securities purchases.
If at all given your 1 billion plus in cash.
Let me start as I mentioned to me that we should buy a couple more.
This year than I did.
No.
You did.
We did actually Gary we did add as you can see in Q4, we did add to the bond portfolio about $190 million and Thats Ginnie Mae monthly floater stuff. So it's very short.
In terms of duration, but from here on.
I was looking at the average balance sheet since March we've added $500 million in cash on the balance sheet just in the last nine months and so I think at this point, we'd probably be pretty reluctant to put.
Any any decent part of that to work.
We really look for the <unk> rate to be increased as fed fund rates go up and then that's going to certainly help.
Maybe just on that every quarter.
Okay.
Okay, and then maybe just on that point on rates here.
I think if I recall correctly, it's 50 basis points. The floors are about 50 basis points in the money and just kind of curious what percent.
Just what percentage of loans.
And the money for us.
So let me let me go through this for you.
Alright so.
As of right now floating rate represents about 86% of the book.
Of the floating rate about 84% have a floor.
So when we're looking at the first rate increase we're going to look at it we're looking at about $800 million little over $800 million of the loan portfolio moving up in the first rate increase.
And then as we go to 55 it gets greater.
Loan portfolio is one thing and I want to add onto that one building and 50000 $50 million of cash.
Yes.
And that will move up together and as part of the securities about $250 million is also well move along with the rate changes. So I calculate that we have about 245 P. M.
In dollars and assets together was the face Firstly 25 since then.
<unk>.
Loans were $2 $45 billion of assets.
It will be going up if rate changes and also.
Immediate.
Sensitive liability is $2 $6 million.
All of our money market and interest bearing DDA and the remaining savings.
<unk>, the $1 $9 billion, which would raise rates 12 112 every month actually we are about 18 months materially.
Our maturity schedule. So you are basically gradually increasing on the <unk>.
<unk>.
So I am personally, hoping with some luck and some management actually when the rates first move we should be doing a little bit better.
And along the way was further increases.
Yes.
Okay.
And then.
I'm sorry.
So thats a good question.
Yes.
Very helpful.
And then maybe just one last question for me going back to the loan pipeline just kind of curious what is the mix of business you guys are seeing in the pipeline coming up.
Okay.
One of you want to answer that.
Well I think the business right now I would say about 70, 30 70 CRE related.
Yes.
30% on the C&I side, Johnny anything that's about right.
After a ci includes mortgage mortgage mortgage with a small percentage increase yeah.
That has always been a lot of our business line, we always keep somewhere around between 28% to 31% in the last few years.
C&I loans.
Great.
Alright, well good quarter and thank you very much.
Thank you.
Thank you and the next question comes from David Feaster with Raymond James.
Hey, this is Eric Spector on behalf of David Peter Congrats on a great quarter. It is really greenfield.
Quality improvement and the further improvement early in 2022, just curious how you think about reserves and the provision going forward.
What you would expect it to decrease back to that 124 level and.
Which is the post day, one seasonal level. If you can just kind of give a quick.
Update on that that'd be great.
First of all we're going to give you a official answer.
Which is one for Mick that she has to be answering to the CPA.
And so on the resent medical situations sure.
Davis history as mentioned earlier that our asset quality is heading.
So really positive.
Positive aside starting out.
<unk> 22, and by the end of this quarter I believe are both auto classify and also special mentioned loans dropped substantially however.
There is still a lot of things that we're watching at this time probably.
Most of the supply chain disruptions and also a high inflation as Mr. <unk> mentioned that.
Sam I will try to increase rate several times this year and so probably that is somehow barbour during the past few years, because thats, a lower cap rate and everybody chasing the prompt year. However.
Even though our key underwriting on those things actually is based on.
<unk> instead of <unk>.
This asset Pablo maybe I'll give a good cushion prior existing loans for new loans, we are closely watching that too.
Donnelley Army crime pandemic issues labor shortages all of these kind of things will give us some <unk>.
Pressure to economy grows so.
No matter what.
Our portfolio is getting.
Got it in better and I believe I you know what.
Does does see issues go away down are normal.
Range is around one 2% plus or minus.
David I guess Youre asking me is that in right now where the $1 37.
They have to see so as 115, what do we think about the differences.
Obviously from operators point of view.
Hope, we can get back to the 1415 level, but right now Steve the whole lot.
Qualitative factors that we are not releasing.
We think the economy is not necessarily out of the woods yet okay. So.
Exactly every quarter along the way.
And I hope that.
Someday, if we can maintain.
Very very clean credit quality, we might even go below one one but we just have to grow every step away and my right, yes, yes.
That'd be getting travel with us.
Alright.
Okay, great. Thank you and then just wanted to do a quick follow up on <unk>.
Loan demand across your footprint and what are you seeing opportunities and the potential for de novo expansion opportunity as well and just kind of hear where you're most interested.
Okay, either one of you want to discuss the opportunities.
Well I think the opportunity is.
We always go in terms of the noble we never.
Expand into a territory for the sake of geographic location and we look at.
Okay.
<unk> that we have for example, Houston, we went into that market, because we were able to recruit a group of experienced banker and go into that area.
That's where the opportunity is.
Johnny feel free to chime in in terms of our recruiting new hire strategy and all of that.
Typically a question Eric on the demand I think demand is pretty consistent across all of our geographic footprint with Houston and New York.
Southern California, but like license that we always look for opportunities, we always look for opportunities for.
Expansion, but we have to fight the final right team and the right people.
That's always been our philosophy.
Okay, great. Thank you.
One more if you don't mind I'm, just curious about your thoughts on capital deployment opportunities, obviously organic growth remains paramount.
Just curious your appetite for buybacks or dividend growth.
Well talk about buyback, okay, I have to something that I have to ask all you analysts day.
And the.
And we will always took buyback is something that rewarding our shareholders.
Well then.
After we buy it back.
It was become less.
And in the CFO .
It was adding value in our stock based on the book.
Book values.
So buying back is that really rewarding.
Remaining shareholders.
Keep on asking the question, we did a buyback okay. So so I guess.
A few if I add back when you see the market sentiment 40 change to pay based on price.
Based so yes, we will continue to do that once we have.
Excess capital, Okay, and when we anticipate when we see the growth is not real.
The primary use of capital when we use it for shareholder return to shareholder.
As you can see we're increasing our dividend continuously.
Alright, great. Thank you congrats again on a great quarter.
Thank you.
Thank you and this concludes our question and answer session and now I'd like to turn the call Chairman and CEO for closing comments.
Thank you very much and.
That's considered that.
We're still in the middle of a pandemic and consider that the country has gone through all these all these are the last two years.
Sure.
Fortunate too.
To be able to have the operating results as we have just discussed and now.
If you based on whatever the fed is saying, Mr. Jamie Diamond, saying that we're really in a rate rising environment that which is.
But beneficial to a rate sensitive bank like we are but we were.
We will be careful.
Every step of the way.
In the near future Okay.
So much.
Thank you.
<unk> has now concluded. Thank you for attending today's presentation you may now.
Now disconnect your lines.
[music].
[music].
[music].
Hello, and welcome to the preferred bank fourth quarter and full year 'twenty, you talked to one earnings conference call.
All participants will be in listen only mode.
Should you need assistance. Please conference specialist by pressing the star can you followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two.
Please note today's event is being recorded I would now like to turn the conference over to Jeff Hawthorne for a financial profiles. Mr. Horst. Please go ahead.
Thank you Keith Hello, everyone and thank you for joining us to discuss preferred bank's financial results for the fourth quarter ended December 31, 2021 with me today from management are chairman and CEO Li Yu President.
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.
<unk> 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 SEC required documents at 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.
Please go ahead.
Thank you very much.
Good morning, everyone.
I am very pleased to report.
Preferred bank's fourth quarter net income was $26 million.
The other 80 cents a share.
And our full year earnings.
95 million or $6 41.
Sure.
The pretax pre provision revenue PTP.
Together with total assets.
Together with total loans total deposits all of these are bank records.
In the fourth quarter.
Loan growth was two 9% sequentially and the annual loan growth was 10 five.
Sam.
We had a very very active quarter.
Total loan production, we generated $587 million of total commitment with $456 million outstanding.
Which.
Double as prior quarters.
Production.
Unfortunately pay off also more than doubled prior.
Prior quarters at $333 million.
For the full year.
We originated one point.
$7 billion of new commitments with 1.26 outstanding.
However, again.
Is 800.
$90 million.
Sure.
Looking ahead.
We had a decent <unk>.
Pipeline as of now.
The pay offs, we remain wildcards.
So.
I personally am very comfortable with.
Our staffs.
The ability to originate new loans.
You see preferred back is a custom loan shop.
Much of our.
Production depends on a one on one contact with the customer face to face.
But the pandemic is take much away from us.
I believe going forward with.
As the economy gradually easing at getting better and pandemic getting easy debt.
It should be reasonably optimistic about our production level although.
No.
It could be lumpy between quarters.
The positive side.
We have little deposit growth in the fourth quarter, but <unk> has about 17.
One 6 million nearly $800 million.
It is very comforting that most of these growth and 90% of it.
Yes.
Transactional signed at lower cost.
Our net interest margin.
<unk> was lower than the previous quarter.
It was mainly because of the changes in assets alive.
Leverage.
As a lowly it remained pretty stable between quarters.
Looking ahead okay.
As we have at 85%.
Of the loans.
Floating.
Yes.
Should work well.
Yes.
In a rate rising.
Environment.
Okay.
One good news to us is that in.
And asset quality side aside from the $9 $2 million resolution and the $23 million that I mentioned.
This release.
On our way to advance another loan of.
Over $4 million to the.
From the NPL level to the level that can be sold.
Shortly after and also we're looking to resolve.
Another $4 million of loans.
Which will be paid in full.
As we as we can see right now so by the end of first quarter I hope.
Loan quality would be even better than the fourth quarter.
Full year 2022.
Obviously, we still have challenges.
Ana Paula.
It's hard to predict.
When the pandemic will be easing up on us.
And also with the challenge of.
A high inflation.
Economy.
Which.
I guess, it's taking time to quiet down okay.
We are confident that.
Country, what eventually dealing with these issues.
Effectively.
But our job is.
Get ourselves as well prepared as possible.
And then Pete.
Alert every step along the way okay.
So I, thank you very much and ready for your questions.
Thank you at this time, we'll begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
You are using a speaker phone please pick up the handset before pressing the keys to withdraw the question. Please press Star then two at this time, we will pause momentarily to assemble the roster.
And the first question comes from Matthew Clark with Piper Sandler.
Hey.
Good morning.
Good morning.
Yes.
Maybe just starting on expenses.
Nice.
Decline in comp expense this quarter.
But you also had some cautious commentary in the release around inflation.
Specifically wage inflation I would think.
What's your thought there on the on the run rate Ed in.
And just overall kind of expense growth for the year.
Well, Ed yes, so yes.
Yes so.
Fourth quarter was good in terms of expense control Matthew we would expect going forward as you know.
First quarter is always a little bit of a headwind for us on the noninterest expense side due to the payout of incentive compensation, but comparing linked quarters from Q3 to Q4.
Incentive compensation expense was lower in Q4, and then the capitalized loan costs were higher in Q4, and as you know thats a credit to salary expense, because we credit the capitalized loan costs and amortize them over the life of the loan.
In terms of <unk>.
First quarter run rates, my guess Matthew would be anywhere between 15, 2% 15, 5%.
Okay, and do you think it trails off.
Like it has done historically.
The balance of the year.
That remains to be seen the big wildcard there Matthew as you already touched on it is on the compensation side, specifically for us recruiting.
Successful in recruiting in the first couple of quarters of the year, you likely will not see that trail off however, if not you probably will see a trail off a little bit.
Fortunately, we're not terribly subject to inflationary pressures as it relates to noninterest expense with the exception of salaries and a few other items.
Got it okay.
Then just on.
The loan pipeline.
The loan pipeline I think Mr. Yu said, it's decent.
<unk>.
When you think about it or when you look at the pipeline and you think about the year ahead is that still enough to get you to that high single digits to low double digits or should we think about something.
The first one and then add.
Ed onto it okay.
Matt This is Wellington I think the pipeline.
Lisa.
<unk> robust.
I believe so.
Especially with the <unk>.
We continue to.
Have a strategic target too.
Higher new relationship manager.
Looking at the pattern from last year.
Our new region, and a new hire that we brought in.
Yes.
They have worked out very well the big wildcard as Mr. Yu mentioned is to run off.
So we just have to run faster than the runoff.
That's the wildcard.
Matt.
Matt as I said.
One thing I'm relying upon our staff's capability.
We did all originated $1 $7 billion in total new commitments.
In 2021.
So which is a very high number considering our total.
Loan size so so.
None of us have a crystal ball, saying, how much will be in that.
Just feel that the economy is getting better and we should be hopefully we should be doing better.
Great and then just on the.
On the margin outlook.
The remix knowing the.
Loan growth was weighted toward the end of the quarter.
Would it be fair to assume that you see.
That remix benefiting the margin in the upcoming quarter.
Can you give us some more color behind the loan pricing that has held up pretty well here and the source of the commercial real estate growth.
Types of properties you guys are.
Being able to finance of late.
I will give you the loan pricing inflammation.
And is giving you the movement of the.
The.
Module situations.
Actually.
Yes.
Actually that.
Okay.
Hello, Hello, we got some background Hello go ahead.
Below for the whole year, the new loan.
Made it anywhere from 50 basis points to 100 basis points.
Less than the loan being paid off.
It is it is higher in the beginning of the year.
Caused by through the year, it's narrowed down to about roughly 50 basis points and I have reason to believe the first quarter. If they are to pay off.
Differences will be more narrowed narrowed further.
And this is a national trend and this trend the interest rate environment. This is a trend of competition.
And then the all banking if you have a portfolio you do nothing about it year to continuously go down because of payoffs or whatever.
Okay.
So we tried to do is generate enough new enrollments.
Okay, two hopefully to bring up to total net interest income.
Due to the to the level that is what is reasonable for our shareholders.
So youre going to add yeah in terms of the margin. We ended the year in the last quarter at $3 28, and as we talked about a lot of that is due to the deleveraging effect during the quarter with the preponderance of the loan growth occurring in the latter part of the quarter and the deposit growth.
Going on throughout the quarter Deleveraged the balance sheet, so that led to the another decline in the margin so.
That said going forward, we would expect with a higher earning asset base certainly we expect net interest income to grow and Thats, what we really focus on in terms of the margin or mathematical output I would say, it's going to be probably flat to just slightly expanding a little bit in Q1.
Great. Thank you.
Thank you.
Thank you and the next question comes from Andrew <unk> with Stephens.
Hey, good morning.
Hi, Andrew.
Okay.
I appreciate the guide on expenses, it's really helpful. Maybe just thinking about it in kind of more holistically.
Expenses normalized a bit higher to start the year and maybe state throughout the year.
I also have an improving rate backdrop, and you're clearly very asset sensitive just taking kind of those two pieces. Together is there any reason, we shouldnt I guess, we shouldn't.
And think that you can manage the efficiency ratio kind of at or below.
The 30% level kind of like we saw this quarter.
Well, yes, 28, eight kind of surpassed our even our own expectations, Andrew but I don't see any reason why we cant keep that in the low thirty's that should that shouldnt be a problem at all.
Andrew.
I have to add on that scale you see.
Efficiency ratio is a function of <unk>.
Net interest income okay and.
When the rates if it doesn't mean raising environment. The net interest income is likely to increase so with expensive less.
Yes.
Yes.
Less of a movement in the interest income so likely that we can maintain that efficiency ratio.
Okay. Thanks.
<unk> impressive at 28.
Okay.
Could you guys maybe provide just an update on how progress is going for the Houston Houston, Texas.
No.
Okay do you want to update you soon.
Houston update we have.
We have it.
In terms of head counts right now we have three three individuals.
And we're looking to hire.
Three more coming on board towards the end of this month so.
I think with that in mind, we always again, our mentality is always looking for productive relationship manager.
While we consider variable costs that can bring in business. So it's all going the right direction Houston under the leadership of <unk>.
So we feel optimistic.
And I also want to add a little bit from a more strategic point of view from the view of our board of directors Houston is a diversification. It is a very small percentage of the total.
Production staff and.
A small loan portfolio and also we have always been careful when you go into a new market.
Want to ask.
<unk> of growth.
Hey, Paul.
Whatever whatever reason it is one of the reasons from our Chief Credit Officer.
You don't want to have a strong growth in the new market. So we will we will be actively growing the Houston office, because thats a good market.
<unk> is that it.
Is that the pandemic change.
The ability of visiting the office support the office. So this is growing this deal.
According to our plan pretty much along with our plan.
Andrew just to add onto that they finished the year ahead of our expectations and that's a very inexpensive piece of real estate to operate as well. So we feel good about it.
Great Okay.
I appreciate it.
That's it for me. Thank you for taking my questions and congrats on a great quarter.
Thank you.
Yes.
Thank you and the next question comes from Gary Tenner with D. A Davidson.
Thanks, Good morning.
I had a follow up on kind of the expense got it Ed for the first quarter of 15, 2% to 15, 5%. If we look at it kind of year over year. That's in line if not below what the first quarter 2021 months, Mike I'm, just wondering as you think about kind.
Kind of commentary on wage inflation and everything we are hearing.
In the economy in general here why that would be the case.
And I'm just wondering is it as it related to that related to the capitalized cost of <unk>.
Benefit.
Having increased production potentially this quarter versus where it was first quarter of 'twenty, one or something else yes.
That's part of it Gary the other thing we did is we accrued some of the payroll taxes that are going to be coming due in February when we pay out the annual incentive compensation.
Our payroll tax expense does go up so we did accrue some of that.
In the.
The year of 2021, so that's why you won't see that quite as high.
In addition to that in addition to that FDIC premiums, it's actually come down for the bank.
As our risk profile risk profile has improved.
Relative to.
Nonperforming assets.
Also first quarter only.
We've been quiet rate raises to our staff beginning will be beginning of March. So it is not immediately that creating a big impact.
Okay. Okay.
That's helpful. And then the second question I had just on.
The fee side third quarter, you had a really significant.
Stronger quarter on letter of credit fees.
I think you talked about fourth quarter being lower but it was kind of below where it was even the first half of the year or so.
In terms of as you're looking out to 2022, knowing that theres going to be some volatility probably in that line item. How are you thinking about that line of business today versus maybe how are you thinking about it.
When we talk in October .
Anybody want to answer that.
Well I don't think you want to answer that.
Gary.
The letter of credit fee side I think.
We should do.
Similar or probably will be greater than what we did in 2021.
Jack.
<unk>.
I think we have the officer.
<unk> already.
Connected with the source. So that's something we would do and on the other type of servers deposit service and Thats something that we believe in our forecast youll be youll surpass at 2021.
Yes.
In addition, Gary Thanks Wellington in addition.
Service charges on deposits continually increases and that doesn't get a lot of notice because it's not a big line item, but year over year service charges increased 30% and that's due to a number of programs that we began internally.
In order to take advantage of the larger DDA base that we have.
Alright, thank you.
Thank you and the next question comes from Steve Moss with B Riley Securities.
Hi, good morning.
Good morning, maybe just starting with.
Maybe just start with talking back to loan yields were relatively stable quarter over quarter.
Mr. You I heard you talk about pricing coming down I'm, just kind of curious where theyre, just any unusual fees or extra fees in it.
The loan yield this quarter.
Okay.
Well.
No as a matter of fact, I think we actually had.
A small reversal of interest income of about $60000 on a couple of loans. So there's been nothing.
Unusual in the interest income on loans and as a matter of fact to take that a step further Steve.
Looking at.
Loan yields over the past five quarters.
Over the past four quarters, our average loan yield is only down 12 basis points.
This backdrop.
Okay.
The strong deposit growth.
Okay.
And twice the amount of the loan growth and also the pattern of deposit growth and loan growth changes.
I mean.
Net interest margin quarter by quarter, but again that.
As I've said that.
We spend much more time and effort and mitigate interest income okay.
Right.
Okay, and maybe just sticking with the inputs to the margin just kind of curious we've had a move up in rates here. What is your appetite for any additional securities purchases if at all given your $1 billion plus in cash.
Let me start as I mentioned to me that we should buy a couple of more.
I did.
Yes.
You did.
Did actually Gary we did add as you can see in Q4, we did add to the bond portfolio about $190 million and Thats Ginnie Mae monthly floater stuff. So it's very short.
Of duration, but from here on.
I was looking at the average balance sheet since March we've added $500 million in cash on the balance sheet just in the last nine months.
So I think at this point, we'd probably be pretty reluctant to put any any decent part of that to work.
We really look for the <unk> rate to be increased as fed fund rates go up and then that's going to certainly help.
Right and maybe just on that every quarter.
Okay.
Okay, and then and maybe just on that point on rates here.
I think if I recall correctly, it's 50 basis points. The floors are about 50 basis points in the money and just kind of curious what percent.
Just what percentage of loans.
And the money for us.
So let me let me go through this for you.
Alright so.
As of right now the floating rate represents about 86% of the book.
Of the floating rate about 84% have a floor.
So when we're looking at the first rate increase we're going to look at it we're looking at about $800 million little over $800 million of the loan portfolio moving up in the first rate increase.
And then as we go to 55 it gets greater.
<unk> portfolio is one thing and I want to add on that one building and 50000 and $50 million of cash.
And that will move up together and as part of the securities about $250 million is also will move along with the rate changes. So I calculate that we have about 245.
In dollars and assets together with the face Firstly 25 since then.
<unk>.
Loans were $2 $45 billion of assets.
It will be going up if rate changes and also.
Immediate.
Sensitive liability is $2 $6 million.
All of our money market and interest bearing DDA and the remaining <unk>.
The $1 $9 billion, which were raised rates 12, 112 every month actually we are about 18 months materially.
Maturity schedule so.
Basically gradually increasing on the AUM fluctuation.
I am personally, hoping with some luck and some management.
Actually when the rates first move we should be doing a little bit better.
And along the way was further increases.
Yes.
Okay.
And then.
I'm sorry.
So thats a good question.
Yes.
Very helpful.
And then maybe just one last question for me going back to the loan pipeline just kind of curious what is the mix of business you guys are seeing in the pipeline coming up.
Okay.
One of you want to answer that.
Well I think the business right now I would say about 70, 30 70 CRE related.
<unk>.
30% on the C&I side Johnny anything.
Alright.
After a CIA includes mortgage market mortgage simply the small percentage increase.
So that has always been a lot of our business, we always keep somewhere around between 28% to 31% in.
In the last few years.
C&I loans.
Great.
Alright, well good quarter and thank you very much.
Thank you.
Thank you and the next question comes from David Feaster with Raymond James.
Hey, this is Eric Specter MB applicator dita congratulations.
That's on a great quarter it is really greenfield.
Quality improvement and the further improvement early in 2022 I'm just curious how you think about reserves and the provision going forward.
What you would expect it to decrease back to that one Q4 level.
And which is the post day, one seasonal level.
Just kind of give a quick.
Update on that that'd be great.
First of all we're going to give your offshore and some of the reserve, which is one for Mick that she has to be answering to the CPA.
And so on the resent medical situations.
Davis administrative mentioned earlier that our asset quality is heading.
So really positive.
Positive aside starting out.
<unk> 42, and by the end of this quarter I believe are both Ara classify and also special mentioned loans dropped.
Dropped substantially however, there is still a.
A lot of things that we're all watching at this time.
Probably the.
Most of the supply chain disruptions and also a high inflation as Mr. Yu mentioned that.
Fab I tried to increase rate several times this year and so.
Probably I would guess summarize barbour during the past few years, because thats, a lower cap rate and everybody chasing the prompt year. However.
Even though our key underwriting on those things actually is based on.
<unk> and setup.
The value of this asset Pablo maybe I give a good cushion prior existing loans for new loans. So we are closely watching that too.
Apparently army crime and damage issues labor shortage all of these kind of things will give us some pressure.
Pressure to economy grows so.
No matter what.
Our portfolio is getting.
Got it in better and I didn't really know why.
Does this issues.
Way down are normal.
Range is around one 2% plus of our clients.
David I guess Youre asking me is that in right now where the $1 37.
So you have to see so as 115, what do we think about the differences obviously from operators point of view.
Hope, we can get back to the 1415 level, but right now Steve the whole lot.
Qualitative factors that we are not.
Releasing.
And we think the economy is not necessarily out of the woods yet okay. So.
We will evaluate every quarter along the way.
And I hope that.
Someday if we can.
Can maintain.
Very very clean credit quality, we might even go below one one.
We just have to go every step away and my right, yes, yes.
Advocating travel with us.
Alright.
Okay, great. Thank you and then just wanted to do a quick follow up on loan demand across your footprint, and where youre seeing opportunities and the potential for de novo expansion opportunity as well and just kind of hear where you're most interested.
Okay, either one of you want to discuss the opportunities.
Well I think the opportunity is.
We always go I mean in terms of de Novo we never.
Expand into a territory for the sake of geographic location, we look at.
The talent that we have for example, Houston, we went into that market because we were able to recruit a group of experienced banker and go into that area.
So that's where the opportunity is and Johnny can chime in in terms of our recruiting new hire strategy and all of that and typically a question Eric on a demand I think demand is pretty consistent across all of our geographic footprint with Houston and New York.
Southern California, but like license that we always look for opportunities, we always look for opportunities for.
Expansion, but we have to fight the final right team and the right people.
That's always been our philosophy.
Sure.
Okay, great. Thank you.
More if you don't mind I'm, just curious about your thoughts on capital deployment opportunities, obviously organic growth remains paramount, but I am just curious your appetite for buybacks or dividend growth.
Well talk about buyback, okay, I have to something a lot I have to ask all you analysts.
And the <unk>.
And we will always took buyback is something that rewarding our shareholders.
Then.
After we buy it back.
And that was become less.
And in the CFO .
Many of you as adding value in our stock based on the.
Book values, so and buying back is that really rewarding.
Remaining shareholders.
Keep on asking the question, we did a buyback okay. So so I guess do you have.
Back when we see the market sentiment fully change to pay based on the price P.
Fee based pay so yes, we will continue to do that once we have.
Excess capital Okay.
We anticipate we'll see the growth is not required in these capital when we use it for with shareholder return to shareholder.
As you can see we're increasing dividends continuously.
Yes.
Alright, great. Thank you congrats again on a great quarter.
Thank you.
Thank you and this concludes our question and answer session and I would like to turn the corner legal chairman and CEO for closing comments.
Well, thank you very much and.
Consider that we're still in the middle of June .
And then Mick.
And consider that the country has gone through all these all these at the last three years we are.
Fortunate too.
To be able to have the operating results as we have just discussed and now.
If you based on whatever the fed is saying, Mr. Jamie Diamond, saying that winning in a rate rising environment that which is.
But beneficial to a rate sensitive bank like we are.
But we were.
We will be careful.
Every step of the way.
In the near future. Okay. Thank you so much.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.