Q2 2022 Preferred Bank Earnings Call
Good day and welcome to the preferred Bank second quarter 2022 earnings Conference call.
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I would now like to turn the conference over to Jeffrey Haas of financial profiles. Please go ahead.
Thank you Joe.
Hello, everyone and thank you for joining us to discuss preferred bank's financial results for the second quarter ended June 32022 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.
Deputy Chief operating officer, Johnny too.
Management will provide a brief summary of the result, 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.
Correct.
We're 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. T 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 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 very much.
Good morning, ladies and gentlemen, thank you for attending our earnings conference call.
I'm very pleased to report that the.
The second quarter of the year was a record quarter in net interest income net income earnings per share loan.
Positive.
They launched it a couple of excess spring why.
Quantity.
And efficiency ratio.
With stable.
Net income for the quarter was $28 million or $1.87 a share.
For the six months, it was $54 million and $3.61 a share.
We are the beneficiary of leasing.
Ray hikes.
And we believe that we will continue to be.
Demonstrated by the future rate increases.
Highlight of the quarter among girls, which grew.
$329 million all.
28 point.
6% annualized.
Well the half of your first half of the year.
Our loan growth was 22 four.
And your guidance.
We have analyzed the.
Outside of the loan growth in this quarter.
And we have found that.
It was a combination of two factors one is <unk>.
Reduced pay off paid off.
Another reason is obviously that we had a strong.
A good origination activities during the quarter.
In fact during the quarter.
April and May was extraordinarily strong.
However.
<unk> beginning June .
As of today.
The pipeline looks like that to pull back to the level of 2021.
Deposit growth was $98 million or 7.3.
For the quarter.
During the quarter, we have seen that.
Competition for deposits.
To society.
Mainly led by the major banks.
And we believe.
The deposit costs will continue to increase in fact assimilate.
The remainder of the year.
This is also true because our customers are basically.
Businessmen and the Saturday.
Investors.
Very good with their money.
With recession Nuomi into air I'll focus is also.
Quantity.
We have already.
Began to deep dive in our portfolio.
And so far we have no did not did not note any U T Rowe.
Okay.
We're currently in the third week of regularly.
Regulator examination and I'm hopeful.
Oh I hope that's that nothing.
And we'll come out so we just examination.
B.
Nonperforming assets increased.
Mainly due to that we paid all senior liens on the property move for close.
So they just property was carry on the bulk of roughly 50% below appraisal values. Okay.
All other areas of the quarter credit quality, such as such as that.
Testified assets and past due accounts all students who have been on <unk>.
Previous year.
For the quarter, we have provided $2 $9 million of provision that was mainly related to the large loan production was.
Yeah.
As of June 30th.
The bank's total loan portfolio consists of.
13% fixed rate loans.
87%.
Loading related loans.
Most of these floating rate loans have.
Have floors.
Yes.
On June 30th.
76%.
Although our total loan portfolio is now fully floating was a net right.
Rate changes.
And what's the anticipated July .
Okay.
Federal Reserve action, we believe at the end of June July there will be only all but two or 3%.
Although our loan total loan portfolios is not fully.
Yeah.
With this we believe our interest income for the remainder of the year.
Well we increase.
We also know that that.
Deposit costs will definitely increase.
We do believe that.
The increase in revenue will be more than enough.
The offset.
The cost increases.
A $32 million.
Share repurchase program.
It's progressing.
As of today, we have completed.
Plentiful, meaning after $32 million that was it.
We'll set aside to repurchase we hope the whole program would be completed.
N D.
Third quarter.
Thank you very much.
I know.
I'm ready for your questions.
Yes.
Yes.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if you're using a speaker phone. 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.
Yeah.
Our first question will come from Matthew Clark with Piper Sandler. Please go ahead Sir.
Hey, good morning, gentlemen.
Hi.
Yeah.
Maybe starting on the the margin.
And do you happen to know the average margin in the month of June and is it fair to assume that the margin expansion in <unk> will be greater than <unk> now that youre fully off the floors.
And you get the benefit of.
You know the new loans are in the new pipeline and higher indices.
Well the first one is easier to answer the second one not so much Matthew but yes, Julian margin came in significantly no I shouldn't say significantly excuse me it did come in higher than the average for the quarter Youre certainly correct on that one.
About 20 basis points higher than the quarter as for Q3, we still expect margin expansion as Mr. Yu alluded to in his comments are read through that interest income increasing at a faster pace than interest expense.
So we certainly expect some margin expansion in Q3 are likely will not be to the extent, we had in Q2, but certainly it would be it would be expanding.
Matthew just add onto that mathematically Lubbock.
Leverage, meaning not only increase especially positive increases it looks slightly that.
We'll be closer than this quarter, so that may be.
Imagine what that leverage factor should be considered.
Yeah.
Yeah.
Okay, Great and then do you happen to have the spot rate on interest bearing deposits at the end of June as well.
I do not know if you I apologize that was I was sitting here getting ready for this meeting we realized he knows the one schedule I did not have in front of me. The other information I knew from memory, So I apologize.
Okay I can follow up and then on noninterest expense in terms of the run rate, what's what's your expectation for the back half of the year.
Well, obviously, our run rate for Q2 was a little higher than than I had previously mentioned.
But I would expect Q3 to be similar to Q2.
The wildcard there is going to be Oreo expenses, you saw during the quarter. We had just under 500000 in Oreo expense to the extent that does not repeat you'll see it down slightly but we still have pressures Sal.
Salary pressures are still ongoing obviously, we're in a very inflationary environment I don't have to tell a lot of people got Fortunately.
Lease cost effects et cetera, et cetera, but are things will continue to go up.
As we continue to operate in this environment, but we were pleased to see even though we went over 17 on the expense side that we still landed at 29% on the efficiency ratio.
Yeah, Okay. Thank you.
Our next question will come from Gary Tenner of D. A Davidson. Please go ahead.
Good morning.
I wanted to follow up a little bit on the on the margin questions and.
No.
Even in a environment of presumably some slower pace of loan growth. Your interest income was going up.
I would imagine go up pretty significantly just from the rate side. So you know.
And as you talk about.
You know the the.
Outlook for NIM expansion.
For third quarter, where when you get the full benefit of the June hike and you know most.
Most of our quarters worth of the presumed 75 basis point hike.
Next week is surprising to me that it would it would you know.
That combination doesn't get you a.
Little better expansion in <unk> and <unk>. So can you maybe just give us some sense of kind of what your.
Deposit rates looked like for you right now you know in terms of Cds or other other deposits because that seems to imply a pretty significantly elevated.
Deposit beta kind of the second quarter into our plan.
Okay.
First question could we actually think that doing that need to be retired with two rate increases may and June okay.
And because that many of our loans was operating.
Lower than floor, so not every loan.
Effective.
And especially I mean that.
As of June the increases will be.
It's affecting.
Less than that.
Okay.
Reported to you, albeit now 76%, although total loan portfolio is now fully floating we expanding expecting that these.
We'll be having a increase that is not showing.
In the second quarter will likely the same codecs vision will be pretty good but as I said also earlier.
Pause it is something that.
Control at this point of time.
The reason is that you see.
Major banks.
Citi Bank and HSBC loans that would.
Deposits pumping is always the highest.
If you look at the pulse.
Hopefully if we records.
Citibank is offering.
Positive effects, maybe people treat this year okay.
Paul P D eight months.
Yeah.
Golden Sachs Marcus snack.
Heading P C DS.
Sure.
Upside kicker.
So with these situations in the picture.
But every bank I expect we'll see.
Deposit cost increases water always seeks to its lowest level and it's a matter of each institution would be different.
In terms of the speed and getting.
To that particular level.
And as also reported.
We are a business back.
All investors profile is different than many of the banks consists of many consumers. So we're expecting also a little bit faster pace.
Cost adjustments.
And Gary on the CD side, I think you asked the one year, we're offering a 118 right now on one year Cds.
Mr use point, obviously, we know the CD portfolio, and how that rolls off and rolls back on but it's that large money market.
Interest bearing transaction account portfolio.
Where there are some larger clients in there and as Mr. Yu said, they do manage their money very closely so we have to keep up to illustrate that began on April with customers.
Please go see D. C. D C. These pay the penalty put the money in the Treasury paper.
They those decision making 2%.
And we also nowadays we see customer all over the place break the old T. C. D. I guess for you.
That was because he's old OTC. This rate was very low the hold it in the comp weighting to win that's when the rate changes some resolve some of that we invested many of them have not.
So these are the action is it's tough to quantify that.
Okay.
<unk> stage of the quarter.
Yes.
Hi, guys I appreciate the color I don't cut to be based in but that's.
Yeah.
Our next question will come from Andrew turnaround with Stephens. Please go ahead.
Hey, good afternoon or good morning.
Hi, Andrew.
And maybe I, maybe just ask the margin question.
A little different fashion, you gave us the month of June was about 20 basis points higher than average.
I guess put us just.
A little bit south of 4%.
On the net interest margin in June do you think in <unk> 22 for the.
Full quarter average you still see expansion from that.
Just shy of 4% level.
Oh, absolutely yeah, no. There's no question I didn't I didn't I didn't wanna be misunderstood on the earlier comment I just wanted to temper. The fact that we will see margin expansion, but.
We see 30 basis points of margin expansion I don't know.
Not necessarily expecting that much but it will be it will be good.
Okay.
I guess from Mr.
Kind of a bigger picture question.
I guess, what I'm, even more kind of rate hikes coming through and you're already putting up really solid profitability I would think you'll become even more profitable capital is already on a solid spot. So I guess my question is more on just on the reinvestment side, where are you focused on making investments today and then are there any inverse.
Once that may have been kind of longer term.
Now kind of more comfortable focusing on and spending on just given the improved rate backdrop and the improved profitability profile.
We actually I think is cautiously stepping forward, okay first of all that.
We know we're accumulating capital.
That's the pace, but in the meantime, I have to worry about.
Economy.
When do the session was coming.
And how long the recession, how severe it is you know in this game came out ultra make mistake. So likely we go let's be cautious of holding the capital before we commit to it wasn't really ready to do it is obviously a dividend increase.
And we will see obviously.
Additional buyback.
We also probably what.
Some of them all money.
In Securities I Hope by then the price is.
Is it much more.
So these are the areas that we would do okay.
Okay.
Okay.
That's helpful. I appreciate it.
And then another one for me kind of on rate sensitivity.
We've heard some.
Some other institutions talk about kind of tempering, especially asset sensitive institutions.
Tempering the rate sensitivity kind of as we progress through the cycle is that something just given how asset sensitive you are.
You would consider doing as we kind of approach.
I guess, a much higher rate cycle.
Andrew can I ask how do you just talk about rate temporary can you elaborate on what that means.
Yeah I mean.
I think banks are doing and kind of a variety of fashions, but I'm just trying to I would assume mainly just the swaps but.
Just tempering rate sensitivity with Oliver.
Well, obviously that.
Well, we kept in this latest stage. After you after increases when you think about our pricing.
In different manners.
And Sean.
Secondly, just a follow up for me about making them more market competitive when they want to consider it a whole lot more fixed rate loans.
But all of this is we have to just.
Just be careful every month every week every month and going forward and we know that that by the end of this year that we need to really take a serious look about how to reposition the portfolio.
Yes.
Okay, great. Thank you for taking my questions I appreciate it.
Our next question will come from Steve Moss of B Riley Securities. Please go ahead.
Good morning.
Maybe just.
One last question on liabilities repricing here.
It sounds like obviously, you've seen changes in customer behavior, just wondering how you know what the duration of securities.
T D book.
These days kind of it sounds like it's probably shortened.
I believe it's between five and six months right now Steve.
Okay.
And then that's helpful. And then in terms of just on the loan pipeline here. You know you guys had a great quarter of loan growth.
You know.
Do we see some of that carryover here into the third quarter before maybe tapering off to more typical levels or just kind of get a feel for near term trends.
Well I don't want to answer that first okay.
Well.
We look at the second quarter was extraordinary and I think that our pipeline continues it should be.
Quite healthy, but you would not be a repeal of the second quarter.
Quiet taper down too low I would say as Mr. Yu mentioned earlier in 2021.
Okay.
Okay.
Great and then it just kind of curious on loan pricing where are you guys are putting on new loans.
It depend on credit then Kimberly will put them on their own.
When the floor okay.
Loan pricing will be anywhere we can find to progress one quarter.
I mean, that's the most.
Right.
And.
Usually the floor will be the starting entry way.
Yeah.
Okay great.
And then in terms of just kind of you know.
Did I hear you on terms of a more more concerned about the reserve and are more concerned about the economic outlook. So how do we think how are you guys thinking about the reserve now.
What's the are you going to be do you expect to add more qualitative factors maybe to the reserve as we go forward and just kind of.
Provision expense probably tracks loan growth.
I will let Dave answer that but I won't tell you all quality juice nobody is already can tell two industry our qualitative factors.
Yes currently we are higher.
Higher than our peer groups at this time.
So to answer your question, Steve that imagine was still.
Continuously applying kind of a cautious posture when.
Reviewing our both a.
Quantitative and as far as qualitative site and also kind of.
You know trying to be conservative.
Closure are supporting the forecast and also pure factor side because of that there is a lot of play economy uncertainty lying ahead.
So it's kind of a mix.
Kind of indication to.
To the bank for a reserve side. So there are some of the negative things GDP neck days and supply chain disruptions.
And the phrase of a highly preliminary maybe coming back we do know this morning, we have our initial plan.
Higher than I expected.
On the other side, we have a good retail shelves and that we have are still Laura and preliminary at this time. He decided he has been a drop a little bit. So we still are picked like cautious.
A kind of a posture at this time when we looked at.
Zev and definitely we are just like QQ, we check up a little bit or Oh, its terminal our economy factors to set aside a little bit more reserve Mr. Yu.
Well thank you.
I have nothing more to add.
Okay. One last one for me just on the Oreo.
Oreo property here.
Just kind of just kind of wondering on the status on disposition I recall being you know you.
You guys mentioned the desirable property is that something could be off your books in the near future here.
Nick I'll, let you to answer that.
Yes, we are.
Especially I take the title now and we're working aggressively with the local reputable volcker and get a house ready for the marketing this coming Friday I believe is officially a well put on market for cell.
And we are hopefully by.
Q3, or Q4, where can I can't read of this Ohio properties.
Although at this property is a luxurious pulse above $10 a square foot.
On the on the block.
And does this become really because it's a bummer.
So in general that that system called.
Quite nice staple Hudson.
I hear you there alright, well. Thank you very much I appreciate it.
Our next question will come from Tim Coffey with Janney. Please go ahead great.
Great. Thank you thanks, sure well I mean ask some questions.
If loan growth is going to revert to say that 2021 level does that imply a say low double digit kind of annualized growth rate.
Yeah, we can do with guiding 2021 between high single to low low double.
So hopefully that hopefully that we can maintain the same level of growth in 2000, 2021, which the low double digits.
Okay, Okay, great and then what's.
What's the appetite for bringing on more broker deposits.
Take a look at that line going all way back to say the last rate hike.
Ben the balances have been kind of in a narrow range, but this situation seems a bit different right now.
Did you hear me Chuckle, when you mentioned broker deposits Tim.
Yeah.
We have no no appetite right now and that's why I think you know when you look at Q3 and the deposit growth. We did manage to get we let all of the brokered money that matured in Q3 run off we didn't replace any of it we're certainly not prepared to pay three per cent for one year money from the wholesale market.
Obviously, the retail market has not caught up to that so it's been a very interesting dynamic to watch but as of right. Now we have no appetite for for brokered money that could certainly change in the future, but we obviously have limitations and we want to stay well below those limitations.
Okay understood.
My questions. Thank you very much.
Thank you.
Yeah.
This will conclude our question and answer session I would now like to turn the conference back over to Mr. Li Yu for any closing remarks.
Thank you very much as usual they will stay on the phone.
Any further questions please call us.
Thank you for your attention.
Yeah.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Yeah.