Q1 2022 Preferred Bank Earnings Call
Good afternoon, and welcome to the preferred Bank 2022 first quarter earnings call all participants will be in listen only mode.
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I'd now like to turn the conference over to Larry Clark a financial profiles, Inc. Please go ahead Larry.
Hello, everyone and thank you for joining us to discuss preferred bank's financial results for the first quarter of 2022.
With me today from management are chairman and CEO Lee you.
President and Chief operating Officer Willington Chin.
<unk> financial Officer, Ed Czajka.
Chief Credit Officer, Nick Pi.
And Deputy Chief operating Officer, Johnny Shoe.
Management will provide a brief summary of the results and then we will open up the call to your questions during.
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 related to preferred bank's operations and business environment.
All of which are difficult to predict and many of which are beyond the control of preferred bank for a detailed description of these risks and uncertainties. Please refer to the SEC required documents the bank files with the federal deposit insurance Corporation or FDIC.
If any of these uncertainties materialize or any of these assumptions prove incorrect preferred bank's results could differ materially from its expectations as set forth. In these statements preferred bank assumes no obligation to update such forward looking statements.
At this time I'd like to turn the call over to Mr. Li Yu. Please go ahead.
Thank you.
Good morning, ladies and gentlemen.
I'm very pleased to report our first quarter.
Net income of $26 million of dollars 74 cents per fully diluted shares. This is a 23% increase.
On the same quarter of previous year.
Ramos.
Was the highlight for this particular quarter it increased.
4% on a linked quarter basis and annualized at 16%.
The fourth quarter loan origination momentum has carried over.
During the first quarter.
Uh huh.
With payoff activity.
Moderating a bit which resolved did this.
Performance in the quarter.
Looking ahead, we are very.
We encourage.
By the applications for new loans that has received so far.
Although.
These applications will be subject to higher standards of underwriting.
But we do believe that our second quarter results could be quite positive.
The positive growth for the quarter was moderate at 1.6% linked quarter or six 4%.
Annualized.
This is well within our expectations.
In light of fed activity.
The higher.
Production versus the lower deposit deposit increases has allowed us to deploy some of our excess cash to better usage and which we think is proper financial statement engineering.
Our margins have improved from the previous quarter by 14 basis points.
This was partially because of the higher.
Deposit Hello, Hi alone increased versus the lower deposits.
That changed the leverage.
Yeah.
Again under the curtain.
Rate rising scenario our environment.
Looking ahead, we're quite positive about our margin expansion. Okay preferred bank is at a very.
Asset sensitive balance sheet and I have include some of the components of our assets for your information in the press release.
On the liability side.
We had a $1 $96 billion of deposit portfolio that has a time certificates of deposits.
These deposits carry a average life of seven three months, which means they would be repricing at a much slower pace than the interest bearing.
Transactional.
Tom.
We have made the improvement in our credit.
Cluster.
Two of the very large the larger.
Yes.
Legacy loans.
Crew bases has been with the bank for over two years.
Finally.
After months and months of its called Battle as well.
Finally, it was awarded.
The two repossessed.
These assets and this so just before the quarter end.
No.
Our loan portfolio is pretty pristine was only $2 $2 million.
Non accrual loans.
As of March 31st.
2022.
There was a charge off.
In the quarter that the charge offs is related to.
The charging off the previously fully established reserve on those legacy loans.
There are no income statement effect.
It is almost certain that undercurrent in frame extraordinary environment that all operating expense will increase and continue to increase.
In the months and quarters to come.
But preferred bank has always been very focused on.
Controlling our expenses.
And.
We have reason to believe that all increases will be will be not any higher than the industry norm.
The first quarter.
Non interest expense.
It's a little higher than.
Previously.
Hi, guys.
Guided to you in the first quarter conference call.
And in the January conference phone call.
And I'd like to apologize for the Miss.
Okay.
And.
The actual number for the first quarter or the beginning will be the beginning of a new norm.
Yeah.
Also like to alert you without.
Share counts and on the fully diluted.
Outstanding shares. It has increased this quarter alone was a price increase of our stock.
And it will continue to change along with the value of our stock.
Yeah.
All in all.
We have preferred bank.
I'm happy with the first quarter.
And we hope we can do even better.
In the quarters to come.
Thank you and 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 telephone keypad, 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.
The first question comes from Gary Tenner with D. A Davidson. Please go ahead.
Thanks, Good morning.
Follow up Lee to your comments on the expense level is as the new norm you know.
If you kind of annualize the first quarter Youre around 65 million, that's seven 8% growth on top of 2021 is that the general perspective on the full year increase in expenses that you would expect or is there any.
Kind of further upward pressure as we go through the course of the year do you think.
Obviously, it's quite unpredictable was the expense going into the future. It is several forces.
Related to the number one obviously inflation, okay, what way to do.
To all of us, especially in the wage category Okay.
And and also affecting us for the renewal of our premises, okay and the leases some of them come to you and they are subject to increases nowadays, okay, but one other variable is that is.
Is that D. The success of our recruiting effort is the most successful we are the highest expense that will be.
So we certainly hope that the excess expenses will be higher because it was.
Okay.
No.
Generally speaking the first quarter was slightly higher than the second quarter, but in this inflationary environment.
It is we have to have provided us enable flexibility of thinking.
Okay. Thank you and then just on the on the recruiting effort side I mean, I know you guys are you know.
Always looking to add quality people is there a particular geography or market that you're.
Particularly focused today.
And we are we.
We are recruiting all from all geographies right now okay. So we're adding people over but also that we are I E that couple of a new new areas too.
To put a new branch in beef.
If we had decided and the location and so on then we will be hiring a group of people in that particular location I had better information to report probably next quarter.
Okay, great. Thank you for that and then just last question for me in terms of kind of operating leverage I mean, you know.
You provided some good detail on the asset sensitivity as it did last last quarter in terms of the adjustable rate assets. It.
It would seem to me that you.
You still can drive positive operating leverage but with the increase in expenses.
When would you expect that efficiency ratio to kind of stay over 30%.
It dipped below it for a period of time last year is that is that what you would expect.
You mean the efficiency ratio.
Yeah, well likely.
I'd like to see it is to a situation when you have a net increase in net interest income.
Okay, which as a result of the growth and as a result of the margin expansion. These to create a higher net interest income and then obviously you have higher expenses, but it would hope the combination of the two would be right around 30% of what we hope we think in a certain range. Obviously, we have been bouncing back Peter.
Eight to about 35% between that between the months.
Okay, alright, thanks for taking my questions.
Yeah.
Yeah.
Our next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Hey, good morning.
[laughter].
Could we just start with.
On the loan side of things.
Able to quantify the new loan commitments in the quarter, how that compared to last.
Payoffs as well.
And then maybe it's a three part question just any commentary on the pipeline and.
And how that compares to the prior quarter or a year ago.
In our prior quarter, we had a $360 billion of new loan I mean, no outstanding and that's the commitment outstanding for the quarter and Okay. And then we'll have a $250 million okay.
So this particular quarter the payoff is reduced from $250 million to $180 million was approximately the same activity indeed.
Origination side. So this is the mathematics.
Okay, and then any color on the pipeline.
Quarter coming out of the quarter.
Pipeline is good not any worse than the first and second quarter.
Okay.
Okay.
Early.
I said earlier nowadays the underwriting standards is higher because of various stress tests and value.
Value situation in light of the inflation and rate increases and also that we are always in the back of our mind that after inflation.
There'll be a recession.
So we have always tried to alert ourself refer back.
<unk>.
Hello, Bad loans are made at a good time, so we'll have to be extremely careful now.
Okay.
And then on the.
On the margin outlook.
Kind of thinking through the remix.
As it relates to <unk>.
Deposit growth relative to loan growth I mean, do you feel like loans to earning assets will continue to March higher.
Assuming deposit growth kind of trails or do you feel like deposit growth should.
Come back.
To better fund the loan growth.
Hi, Matthew This is Ed you know to Mr. Use comment earlier about the loan growth coming in lower than previous quarters and within our expectations. I think you touched on something I think we'll see throughout the year.
With the M. One supply are seemingly going to start shrinking.
When the fed ends its QE and also starts to raise rates were okay with a lower level of deposit growth and then fully.
Utilizing the cash in the balance sheet towards the loan portfolio, obviously, expanding the margin and leveraging the balance sheet.
Got it Okay, and then just on the provision and there was a comment in the release that part of the basis for reducing reserves was an improving economic.
The economic outlook.
Well the thought that would've been because the opposite in terms of the commentary and assumption.
Should we assume that that.
Kind of a reverse itself here in the upcoming quarter.
Our provision.
I will ask <unk> to answer that I will add on.
Sure.
Play clock. This is Nick a photo reserve side, even though the current economy it seems like.
Okay stage, but still we have a lot of utter are uncertain to start we have concerns such as Labour power short ages.
High inflation and supply chain interruptions.
Oh, it was kind of a things quick rate increase environment.
And the higher energy cost.
And also Mr. You mentioned, an increase to the possibility of a future recession.
So even though there is that kind of a situation wait for this quarter, we still.
A little bit more reserve on the qualitative side as Mr. Yu mentioned, we tried to take a more cautious posture at this time.
I guess with scatter.
Oh, Yeah, I think it's probably safe to say the release might've been larger had we had more rosier economic predictions within the seasonal model rather than what it came out to.
Understood. Okay, and then last one for me just on the.
The letter of credit fees, how should we think about that activity in a rising rate environment.
Slowdown in the macro environment.
I think it will be probably pretty stable.
Now.
It's also.
Stable, but but I'd like to say, it's sometimes very unpredictable.
The LLC as such that the customer has a need.
Yeah. So we're charging fee right. So the activity is.
It is really customer specific.
Hard to relate to any economic conditions.
We tried we try to to try to have a patent on that we haven't had them getting successful.
Yes.
Understood. Thank you.
Yeah.
Our next question comes from Steve Moss with B Riley Securities. Please go ahead.
Good morning.
Maybe just let me just start off with deposit pricing here in the release you guys talked about.
Cds Reprice has floor pace just kind of curious here what are you guys thinking for.
CD rates with the 50 basis point hike coming up here in May in all likelihood and just also just how you're thinking about deposit betas more broadly.
Well.
Do you want to answer that.
I'll start off in terms of.
Deposit growth going forward, I think where we're okay with a lower level, but in terms of deposit betas and rate changes going forward, Steve We're seeing an interesting thing at least in my opinion I'm seeing an interesting thing in the markets.
We're really not seeing much movement at all on the retail side of things wholesale funding has moved a lot. It started moving in January .
But the retail funding is still we get a rate surveys every two week that we go through very extensively and we are still seeing very few banks move beyond 40% to 50 basis points on a one year CD.
And so what I think youre going to see this time around you know you hear this all the time at this time that will be different right, but this time around with the economy and the consumer and businesses do still have a lot of cash on hand, and so I think it's going to take some time to whittle that out of the system going forward.
And as that happens I think you'll slowly see banks start to raise their offered rates, but at the present time, we're just really not seeing a lot of movement. So it's a little bit like a goldilocks moment right now for at least for the time being.
Do you have anything to add okay.
I mean, Ed and I, We review this weekly and so far we are holding very well on the consumer side on the retail side I should say no.
Okay, and then on the sell side a lot of those negotiated rates anyway. So those still are fairly low as well.
Okay.
Got it that's helpful and then in terms of just.
On the loan pipeline being strong as maybe what types of lending opportunities are you seeing I mean, obviously you had good commercial real estate growth here this quarter.
I'm just kind of curious like the underlying types of properties. You guys are running on a are you expect to lend on here going forward and just when we think about loan growth for the year you know, obviously, a really strong pace here.
Are you guys thinking.
Low teens type number ex TPP.
I wanted to ask about that sure.
We are.
He's looking for new talent and so you mentioned earlier so winters.
We're looking for tolerance collinsville.
Ill take the lead when we get to expand winters, Southern California, Northern California or elsewhere.
In terms of.
We're looking at the market pipeline right now I think.
Post pandemic do you have a lot of opportunity people are looking to acquire.
Looking to reposition and so a lot of opportunity in multifamily and industrial type of facility.
Great and then just in terms of the tighter underwriting standards here and just remind us.
Kind of what the debt service coverage or loan to values you guys are looking at these days.
Yeah.
Yeah lots of value.
The.
Data is around 55% 56%.
And this year are definitely as Mr. Yu mentioned that there were a fairly conservative plan. There are writing the lungs with consideration of future rate increase. So currently it's around one point actually on a bus.
Okay.
And then just one last question.
Small one in terms of.
The Oreo properties that you guys took over here you guys made comments about resolving it shortly just kind of curious as to how quickly you think you can liquidate them.
Well, we hope it doesn't yesterday, we had offered.
No.
But things to be the property is well stop after it so well.
Bulk is telling us that they feel that the price is very advantageous to us under the current market.
Oh.
Yeah.
Great.
Well. Thank you very much appreciate that.
Okay.
Our next question comes from Andrew <unk> with Stephens. Please go ahead.
Hey, good morning.
Andrew.
Okay.
Just to start off I hear some of your comments on kind of deposit growth expectations and just the overall kind of leverage the balance sheet.
I'm looking at there's still quite a bit of excess cash it seems like.
On the balance sheet today I, just I guess, just given the move in interest rates, we've seen so far.
Appetite or willingness to take kind of a bigger swing into the <unk>.
Securities book here.
Great question, Andrew and I'll say at this point the answer is probably you know we took a little bit of a swing last last September and bought almost $200 million of monthly Ginnie floaters, which are actually performed pretty well.
But to the extent, we can more utilized the cash.
Into the loan portfolio and then remember also that cash is also going to move up and rate too as the I O E R.
Rate moves in lockstep with fed funds, we'll see that cash benefit as well so that's a.
You know a nice production of that so.
We are not going to forego deposit growth, let me be clear on that we still believe in deposit growth and that does form the foundation of the bank of the franchise value of the bank. So we will we will get deposit growth. This year, but we will not be as hard pressed for deposit growth this year.
Hum.
Understood. Okay. That's helpful. I appreciate it.
And then maybe looking at that.
Core loan yields were around kind of the margin.
Down I think maybe 10 basis points or so this quarter anything unusual on the kind of core loan yields.
Interest reversal.
Or anything just anything maybe noncore and are in the loan yields this quarter.
No we don't have it.
<unk>.
No, but I will say, we did see a small uptick after the rates after the mid March fed hike. So.
And we saw that also on the cash side. So that's beneficial.
Yes.
And then one last question for me Mr. You.
I know historically you have not been very active in kind of bank M&A I just wanted to get kind of updated thoughts from you whether you were seeing anything kind of interesting on the M&A front.
Any appetite.
It plays into your thinking about running the bank moving forward just any kind of updated thoughts on bank M&A it would be helpful.
Now that we have.
Number one thing is that maybe it's al.
Okay, we'll leave it on the conservative side about acquisition situation.
So we will look and is continuously obviously intermediaries would that was introducing do you use to us.
For various reasons either pricing or.
All of the patents all it'd be geographically the.
We have not had much success in just a couple of deals with getting close to step number two but it seems to be didn't materialize any further.
In our calculation about the accretion accretion requirement is properly.
One of the tougher.
In our industry one of the reason is that we can internally generate I mean.
More than 15% of gross as the average and the need for acquisition to increase the balance sheet is is not that.
Eminent and therefore that we choose the most profitable.
Our organic growth so.
Needless to say when the organic growth started to fade, even stop we have to think about how to make this institution, while profitable and I hope the acquisition, we make would be profitable because as I know it not every acquisition will work out well okay. It just didn't show up in financial statements.
And in OLED.
I hear Ya any kind of color you can provide on just what that you mentioned.
The internal kind of EPS accretion or I don't know if its IRR threshold.
Our tangible book value earn back any kind of.
Color or specifics you can give there on the financials, you kind of try and target.
Well I'll, just say that it is the strategic things that I'm looking at it I don't look at that much I just looked at accretion of after you. After EPS and then also the important thing to me is how much is how much of the dilution of the book value. Okay. Then the paybacks on the situation.
Inflation is are you really take a pocket you're prepaying for whatever the earnings so for many many years and hope you can make it back through some.
Efficiency.
And that combined operation and we must be cognizant of that.
Not everyone is going to be perfect the executed.
So we were just looking at very carefully as the book value dilution side of it.
Yes.
Understood. Okay. I appreciate you guys, taking my questions and congrats on good quarter.
Thank you.
Our next question comes from Tim Coffey with Janney. Please go ahead.
Great. Thank you and thanks for taking my questions.
The press release, it's got some really great color on the asset sensitivity of your balance sheet and you are one of the most well more asset sensitive banks in the West Coast I'm wondering can you quantify what the gain to net interest income would be say off the 50 basis point move higher.
[laughter].
Off the top of my head.
Unfortunately, I can't right now I can tell you that in a 100 basis point shock.
Think we're about 9% to 11% higher on an annualized basis.
Okay. That's helpful.
And then can I ask a question about the cadence of loan growth in the quarter.
Did the increase in rates.
All forward any business towards say the March month relative to January and February .
Second increased straight actually.
Actually is.
Creating more opportunity to us because previously that.
At most we lose many mainly to pay offs is to the people offering low rate fixed rate loans.
At 10 years, sometimes decades someone who is doing a five year interest only 10 years interest only.
We're losing to DSD is when we're thinking about rates, it's going to change.
And.
Why get into the fixed rates that Youre you why we are pondering about that would keep on losing loans are losing competition.
Competitive competition for loans on that region and thank God, everybody starts thinking I mean, they should not be baking low rate fixed rate long anymore.
So so we've become the equal basis of competition. We're all I think a competitive advantage of high touch one on one service delivery and customer relations start to come back and are benefiting us.
Okay. That's good to hear then what is your expectation that pipeline fallout will decrease going forward.
If based on rate.
Yes, I would say that you will decrease although debt.
The one caveat is that we have to underwrite it more carefully.
Right right, Okay that makes sense.
And then speaking of that.
Serve levels.
The ratio do you feel like it's prudent to start increasing that ratio right now or do you need to wait for more information before doing so.
We.
Are we talking about all our credit quality is yeah, yeah. Okay.
Okay.
So, we actually and I I'm going to answer it.
Ways about it okay and I just reported to our board says we will be starting internal loan review appear.
In the late second quarter early third quarter in light of two situations.
One is a continued high inflation.
What would that do to many of our customers industry are customer specific.
Okay.
And we also to project.
As to the patient situation wouldn't recession.
Situation come which of our customers are likely to be to be.
To be effective so we can pay for active moves in relating to <unk> and the bank wide.
Review will be studying in late second quarter or early first quarter, because we do have examinations scheduled.
In late second quarter, we'd like to take care of the.
Examine its first so.
So on the <unk> you said that obviously, we went through many many drills Republic claim to do the same drill in the third quarter and looking ahead as to what product line is Florida four out of the market situations with a product line is a is continued to be copied.
Favorite investment, but it's safe to say and then you just speaking from common sales in my past experience.
When the early stage of inflation, there's many many of our customers are astute customer is really and try to acquire real estate because they think over the long term and they had the holding power they think over the long term.
Assets is.
<unk> is the best protection for the inflationary situations. So while we are also cognizant about that but we still have to do.
Assets, we view on the honesty.
Great.
I appreciate the color.
Answer your question would result depends on the results of the review that Mr. You spoke up to whether how we look going forward.
Relative to the ACO.
Right, yes, Okay. No that's great I appreciate the color those are my questions. Thank you very much.
Yeah.
Again, if you have a question. Please press Star then one.
Our next question comes from David Feaster with Raymond James. Please go ahead.
Hey, good morning, everybody.
Hi, David.
Mr. Yu I, just kind of wanted to follow back up on your commentary kind of talking about the competitive landscape it sounds like.
It's a bit more rational than it has been but you know as you think about your adjustable rate loans how effective.
Have you been able to fully pushed through that 25 basis point increase on the $1 4 billion of loans that reprice immediately and I guess just with the competitive landscape. How do you think about your ability to push through the next couple of rate hikes like if we do get a 50 basis point rate hike in the next two meetings would you.
Expect to see more payoffs and paydowns as competitors price lower or I guess, just how do you think about your ability to push through higher rates.
Each cycle is different okay.
But however, this cycle what I can see is that op margin, meaning that the index.
Number is competitive competitive with other.
I mean, our competitors when they all face in other words, if the law is the worst people SaaS.
But he is offering people is that okay.
So right now for other people to offer.
Much lower index number two alone.
I don't see many of our competitors is doing that there's always been few over there, but I don't see a majority of the people would be doing that and they say hey I.
It could yes.
As sensibly as we all okay. So I actually do not think that we will lose a lot of business because many of the things.
Pushed hiring highly rate.
To treat alone more so if anybody wants to do that is because the economics.
Their own.
One thing.
Only two of them.
Okay. So so are you starting to see new loan yields improve have you seen like an inflection in new loan yields.
Across the portfolio.
In the last few quarters I have told you that.
Uh huh.
Oh, the loans paid off is right as the agenda anywhere from 75 basis.
Points to 50 basis points higher than the loans being being made this quarter that nobody's narrow down to 2026 or 27 standards. Okay. So.
I have a feeling on our situation will be the second quarter, the new loans will carry a better rate.
Okay.
Okay. That's helpful. And then just you know on the C&I growth in.
In the quarter that was great to see just curious.
Whether you think that that was a function of drawings on existing lines as borrowers are starting to build inventories or are you seeing increased demand for new lines and then just what are you hearing from C&I clients and how is the C&I proportion of your pipeline as it increased at all or is it still kind of that 70 30, I think we talked about.
Uh huh.
I don't have a comment okay, hi, David It's Wellington is not necessary not much fund the existing line draw down we had.
A couple of good wins on the new C&I relationships and really that's where it's coming from.
Both.
Okay.
That's helpful.
Yes.
Thanks, everybody.
Our next question comes from Jordan Hymowitz with Philadelphia Financial Please go ahead.
Hey, Thanks, guys before I ask my question Lee and team I, just want to say I've covered you guys for 20 something years since the IPO, you've got not only a great job, but the integrity and thoughtfulness and your willingness to.
Say when things are better or worse as Israeli refresh and you guys deserve a great kudos so good job and asking for you guys.
Yes.
Thank you.
Maybe my day.
Yes.
I have a question for you on follow up to the other gentlemen, M&A question and I'm, not saying you should or shouldn't do M&A, it's a different thing, but with Rbbc's, chairman now residing because if a proprieties and rumors that that may or may not go out in the market, who knows but would that be a property at a certain price that you might be interested in.
Yeah.
Number one well situation.
I have at least among the group of firms that was represented here today at least show a three as contact me on this particular thing.
Except but none of them knows.
As well as I do okay.
Many of the board members my friend, Okay, and obviously in.
The former chairman President.
President and CEO was a long time, a long time frame of mind too.
So I know the situation okay.
And it's.
It's a matter of their expectation.
And it's a matter of just after they have stabilized the situation whether their business level, how much steel represents a vibrant.
<unk> ongoing business is also the likelihood of a slow growth business.
So it depends on the price unless I can deliver you guys you're already shareholder.
Deliver to you a better future year by year, why should I do that.
Okay. Thanks, so much congratulations and I appreciate it.
Thank you.
This concludes our question and answer session I would like to turn the conference back over to Mr. Li Yu for any closing remarks.
Thank you so very much for joining our conference you have any questions. Please call Ed and I all I.
I'm also added me anyways.
But we'd love to answer that thank you so much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.