Q3 2022 Preferred Bank Earnings Call
[music].
Good afternoon, and welcome to the preferred Bank third quarter 2022 earnings Conference call.
All participants will be in a listen only mode.
You need assistance like they know a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May press Star and then one to withdraw your question you May Press Star two.
Also note todays event is being recorded.
At this time I'd like to turn the floor over to Jeffrey Haas of financial profiles. Please go ahead.
Thank you Jamie Hello, everyone and thank you for joining us to discuss preferred bank's financial results for the third quarter ended September 32022 with me today from management are chairman and CEO , Li Yu, President and Chief Operating Officer, Wellington Chen Nick The Chief Financial Officer, Edward Czajka Chi.
<unk> 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 the course of this conference call statements made by management May include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, such forward looking statements are based upon specific assumptions that may or may not prove correct.
Forward looking statements are also subject to known and unknown risks uncertainties and other factors relating to preferred banks operations and business environment, all of which are difficult to predict and many of which are beyond the control of preferred bank.
For a detailed description of these risks and uncertainties. Please refer to the S. E. C required documents the bank files with the federal deposit Insurance Corporation or F. D. I see 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 very much.
Good morning, ladies and gentlemen.
I'm very pleased to report that we had another record quarter.
Third quarter net income was $35 $2 million.
Oh $2.40 per fully diluted share.
This quarter's Ernie was contributed to.
Aided by the.
February 2nd deposit.
The rate increases in a very sensitive asset sensitive balance sheet.
Also the large loan increases on June 30 years is also.
Reflected in the quarter.
Kim.
This quarter.
We tend to equity is <unk> 23 per cent.
Loan growth has moderated down to eight 5% for the quarter.
It is not unexpected under the current economic condition.
Intraday loan growth was four P M.
One 1%.
Pete Pete.
Deposit growth was three 5%.
Yes.
Deposit cost has increased.
But deposit costs increase will continue.
Continuing to accelerate starting from September and it seems to me would be considered continued to accelerate in the fourth quarter.
Because the deposit cost increase is much less than our loan yield increase.
A 60 basis point expansion in our net.
Mark.
Amit.
Our credit quality remained stable.
Classified assets as modestly moderately.
We do.
This quarter, we have no charge offs.
But we have a $2 $4 million recovery.
Two together was a 2.7 million provision.
Provisions.
Our loan loss reserve is increased to 1.3.
3%.
Yes.
The bank's operating cost has increased.
Because of the inflationary conditions and also the banks.
Closely and astrocytes.
However, since we have the large increase in revenue.
The efficiency ratio has actually decreased a little bit over.
25%.
Yes.
We have been recognized the macro economy is heading into a recession.
Okay.
At present time.
Our top priority is our credit quality and the management of deposits and deposit costs.
We have done well so far.
And we'll certainly be continued to be alert.
In the future quarters.
Thank you very much I'm ready for your questions.
Ladies and gentlemen at this time well begin the question and answer session.
That's the question once again you May Press Star then one on your Touchtone telephone.
You are using a speaker phone we do ask you. Please pick up your handset prior to pressing the keys to ensure the best sound quality.
To withdraw your question you May press Star two.
Once again that is star and then one to join the question queue.
Okay.
Our first question today comes from Gary Tenner from D. A Davidson. Please go ahead with your question.
Thanks, Good morning.
Hi, good morning.
So last quarter.
And Lee I think you said that.
You thought third quarter NIM expansion will be less than it wasn't a second quarter, obviously, we had some.
Some more tightening than I think expected rate hikes than I expected at that point in mid in mid July .
But as you think about the fourth quarter now potentially to 75 basis point hikes, a full quarter of the September hike.
Can you kind of positioned the NIM outlook given the commentary in the press release regarding deposit cost acceleration since September .
Okay. The final answer is with no idea, but I have to tell you what we know about <unk> first of all I'd like to share.
The September quarter is that 75 basis will be fully twice students in the fourth quarter.
And in November if we to 75 basis points will be to search like it priced in in the fourth quarter ended December is anybody's guess at this point in time that will be the revenue expansion.
The cost increase has decelerated quite a bit.
And if you know that over.
Although the marketplace scales I mean people is paying all over the place right flawed 50 positive, especially in the interest bearing demand deposits money market and so on.
And the it and the <unk>.
P C D rates paid by the major banks is now over three 5% now.
Yes, they really set the bar for all the small guys.
Sooner or later that would be possibly increase in the fourth quarter. We will have about $400 million deposit, which is a P. C V will be materially will be repriced and there'll be many.
D C D will be early withdrawals and pay a penalty.
We opened for a higher rate.
B Mab.
Magnitude.
The pace of increase we are really.
The mercy of our competitors.
So the best we can do it.
Is keeping alert and manage it but I like to see that I would see that NIM, probably will be continuing to expand well not to the same level of the third quarter.
On the negative side into the fourth quarter, we also would see that.
We probably would have to replace all of the one off deal.
Okay, and then because of market conditions changed appraisal values changed world, we will conduct a pleasure to a respectable better value on the situation.
In terms of that specific reshaping, we've talking to one specific oreo or you're talking about how.
Are your portfolio broadly others, Austin should be in contract waiting to close.
Okay, and what's the size of the one that you're suggesting you may have to reprice.
$21 million.
20 to 22 minutes.
32 million okay.
Thank you I appreciate the color there and then.
Historically preferreds that are very much at a low enough spread driven revenue story.
And even the growth in the third quarter, which is low by preferred standards is quite a bit stronger than most that we've seen so.
Given broad expectations of a slowing economy, particularly as it relates to real estate activity.
Where do you think loan growth looks like in the fourth quarter and frankly as we go out now at least not early part of 2023.
October the platform it is kinda back.
It does not tell us enough of a crystal ball.
Again, it has to do with the economy.
Yeah.
And what we know is in the marketplace at least on the real estate side now that.
Actually about the <unk> transaction is much reduced and many of them own proposal came to us as is subject to a much higher standard.
Understandably.
Cash flow test will be completely different.
So we knock.
<unk> the whole team.
Oh for Q2 on grosses, if we will reach the third quarter I consider it was very very lucky, but then the actual amount will also depend on the fourth quarters.
Uh huh.
Commercially commercial industrial or C&I loans, they'll draw down their usage in the fourth quarter, when some of that pick up or down a little bit which when local crops.
Uh huh.
Sorry, but the Wishy washy answer.
That's the only way I can answer.
Yeah.
Understood I appreciate the color you were able to provide thank you.
Okay.
Our next question comes from Andrew Terrell from Stephens. Please go ahead with your question.
Hey, good afternoon, or I guess good morning.
Good morning.
So I wanted to start some deposit growth it was good to see this quarter.
Can you just talk about how you think just overall deposit growth trends over the next few quarters and then I know it looks like we saw some migration from noninterest bearing to interest bearing accounts do you think we should see similar level of kind of deposit mix shift moving forward or do you think I guess commensurate with deposit costs.
Do you expect the mix change in the deposit composition to accelerate from here.
Well I think I would do some explanation that I also at Wilmington.
And so some of that especially U S. Okay.
Well first of all is that.
At this juncture that we manage deposit we tried to stay.
Our current levels and that's what we don't want to lose any deposits that's al Bolles.
Primarily coal queso.
And if we have killed.
<unk> grew a little bit.
We will do so the matter is ever deposits coming from my point of view.
Want to keep it.
The current situation.
We don't know the fed tightened league games.
Well, what what situations.
And then secondly as consumers.
Consumers the Haynesville has changed preferred bank's customer basically a wealthy individuals and businesses all of our businesses.
They are very savvy with their money.
<unk> taken many choices.
Lucedale was their money. So the question is that.
Or does he want to put it into two different type of trial.
We do not know any advantage.
But we are facing much more competition on the market side. So our job is to stay on top of it.
On the daily basis literally do stay on a daily basis was off deposit base why don't you want to add to that I couldn't add any more but that's very straightforward.
Straight to the point.
No that's great I appreciate that.
Yeah.
Maybe for Ed do you have the.
Yeah.
The spot cost of deposits either interest bearing or total.
At the end of the quarter.
Yes.
The total cost of deposits, including including DDA would be 96 basis points up you know a quarter that was the run rate in September .
Okay.
And then where are you.
You mentioned, the kind of market rates from some of the larger banks for for time deposits, where where you're pricing new kind of a one year CD rates up.
Right around three three to three and a half.
Okay.
Depending on the client relationship side, we're just raise it.
Okay, we have to continue to raise almost well not change our race on the weekend.
Yeah.
That's how fast markets is changing.
Yeah, certainly a quick rate environment.
Maybe just one more for me.
I wanted to ask just kind of looking at the step up in loan yields quarter over quarter, obviously nice to see but just thinking about a lot of the prime based commercial real estate loans.
On your balance sheet I'm curious have you have you looked at kind of updated debt service ratios for your clients.
Any areas specifically.
Other segments of the portfolio geography, where you're becoming a little more concern just given the.
Magnitude of shift upward in prime rate.
Well Nicki Minaj.
So the first.
Yes, definitely that there would be some pressure a hunger TCR si.
Ever during the last quarter are all of the management team under alongside has found suitable.
Oh, CNI loans CRE loans with our officers are one by one with a certain dollar amount.
Yeah, we didn't recognize any are you sure. It's fun definitely there are some of the loans that we need to watch it closely but we don't we don't notice any.
Severe trouble at this time.
Well known situation, Andrew as you know.
The great majority of our loans.
Over 90% of alone.
It's personal guarantee.
So, whereas when we do our underwriting we will have somebody considered the personal care.
And then they'll keep the ability of neural networks.
And stayed behind that so that's one added protection.
Textual Bobby.
Okay.
Perfect Congrats on a great quarter and thanks for taking my questions.
Okay.
Our next question comes from Adam Butler from Piper Sandler. Please go ahead with your question.
Hey, good morning, everybody.
This is Adam.
<unk> covering for Matthew Clark.
Hello, Adam.
Getting started with that.
Noninterest expenses I saw that it increased this quarter, mainly due to kind of inflationary pressures is that a good run rate to assume going forward.
Yeah, and you know.
Going forward, we hit 17, four this quarter that's with.
Real estate charge of 300000, so on a.
Regular run rate you could make the case that was closer to 17, one but looking forward, we will likely have some more on that on a regular run rate I would I would say high seventeens mid to high Seventeens going forward.
Because we will continue to have our expense increases we're gonna have lease cost increases are still additions to personnel et cetera.
Okay, great. Thanks, and do you guys have the weighted average rate on new loans in September .
Yeah.
Uh huh.
The weighted average rate and new loans in September so we aren't just for this quarter.
Got it for the quarter, we got it for the quarter and this quarter.
Yeah, well the Florida alone is the new loans that we're getting is let me see I like slide five.
59955 29, 9%.
Okay, great. Thank you.
That's all my questions.
Okay.
And our next question comes from Tim Coffey from Janney. Please go ahead with your question.
Thanks, Martin gentlemen.
Most of my questions have been answered, but I did have one for you given kind of your geographic reach in our specialties is that we're hearing from different parts of the country that certain banks are starting to pull back from what we consider kind of core loan products like commercial real estate and certain construction loans right now or are you seeing that from your competitors right now.
<unk>.
Well, what do you see as well.
Okay.
You see it I see that basically.
Generally everybody seems to be more cautious right, yeah, okay, and there shouldn't be searching certainly is universally.
Clothing us as being more careful like office product at all.
Second certain loan area that would be very careful.
So again.
Long is one off.
You have to see.
The LTV of the mall and also the sponsorship.
Okay. Okay, so, but generally speaking I see a lot more reluctance for all competitors.
So in doing that.
Yes, that's fair Okay that means the market is pretty much everyone is very cautious.
So pullbacks, probably a strong forward I think cautiousness.
Okay. Okay.
Yeah.
Geographies I'm talking about aren't necessarily ones that you're in right now so it could be different in different markets.
They're saying, okay, alright, well. Thank you very much that's my question.
Thank you.
Yeah.
Once again, if you would like to ask a question. Please press star and then one to withdraw your question you May Press Star two.
Our next question comes from Eric Specter from Raymond James. Please go ahead with your question.
Hey, guys just wanted to follow up on the NIM.
How do you guys think about managing rate sensitivity here in light of accelerating betas and how would you prefer doing that is that putting in more floors on your loans, adding swaps doing more fixed rate lending I'm. Just curious just kind of your thoughts on managing rate sensitivity going forward.
We have <unk>.
Many of our loans, which we had previous to the schools that you.
You can please refer to the last quarter as well.
Press release is outlined they have that.
I mean, how much more we have had before on the whole situation.
So.
A majority of all floating rate loan Kansas.
I guess this practice will continue.
And in fixing the product fixing the product will definitely come sometime in the future, but the timing of it is is cannot be predicted right now yeah lot to deal with the Fedex.
As the economy situation, so we will stay.
It's definitely in our plan, but.
Sure.
Well I was just add on the deposit cost side, unless you already talked about it. It's really just a balancing act it's more art than science really is managing the deposit costs and an upward environment like this versus your deposit growth and managing the cost at the same time, it's just a very tricky thing to try to do but.
Fortunately with the asset sensitive balance sheet, we have a little cushion.
And in terms of rate floors are at last count of the prime based loans roughly three quarters of them have floors on them.
And then in terms of swaps, we have not entered into any swap type agreements at this point.
Okay. Thank.
Thank you for the color and then you deployed a portion of your cash this quarter, but you still have a large portion of your assets in cash how do you think about deploying liquidity going forward.
This ear marked for potential deposit flows and then just kind of curious if you have a targeted cash ratio.
Yeah.
Well I guess.
Suddenly you're investing side, which I mean, you're a customer and telling your cash is king.
Okay.
The unsettled environment, all it could be killed.
I guess I'm following up on the device.
Okay.
I think at some point there will be opportunity for increasing the investment portfolio I don't think we're there yet though.
Okay got it.
Sorry about that okay.
And then just kind of curious your thoughts on capital you've completed your share repurchase during the quarter.
How do you think about that going forward and are you, taking a more cautious outlook or.
Important capital ahead of like a recessionary period, or how you're thinking about that.
Oh, one first of all in a recessionary period, especially when people like Jamie badly. It says it's a serious recession.
One that keep your capital, Okay, and not only US I think majority of our shareholders and I think.
Regulators, everybody, including our board of director want us to be.
Hold on to our capital.
The one the situation eases, Dan obviously would have to be for that.
Okay got it and then one last question.
Just curious about.
About your Houston L. P O and how the pipeline is kind of.
Developing there and your appetite for additional de novo opportunities near term given the backdrop.
One thing I wanted to talk about it sure.
Eric Houston, They continue to contribute I think you know we have a whole team over there so our plan of course.
Graduating from L. P O to O full service branch. So that plan is still ongoing so that's been good for us.
And what.
What was the other question.
No vote again.
You mentioned before.
Sure.
When you look at the opportunity to Novo strictly based on human talent.
We're not gonna go anywhere because we feel like it's a bit of geographic location or whatever and there's we have a local team available.
It's all opportunistic situations.
Okay got it well. Thank you congrats again on a great quarter and I'll.
I'll step back so much.
And our next question is a follow up from Andrew Terrell from Stephens. Please go ahead with your follow up.
Hey, Thanks for taking the follow up question.
Kind of in the same vein, maybe its capital but.
Youre, earning a lot more money now with with higher higher interest rates.
Incredibly profitable.
Efficiency ratio is 25% I'm, just curious how youre thinking about kind of maybe using some of this some.
Some of them are kind of the higher profitability at a higher level of income in terms of reinvestment in the franchise are there any <unk>.
Areas that have been kind of earmark that you may be able to accelerate in terms of all kind of franchise investment standpoint love to hear your thoughts there.
Do you want to answer the first one.
Well I think as you know Mitch you talked about you know going into this environment capital is king and we are obviously, putting a lot more into the coffers are I think one of the first things would probably revisit the dividend level that would be at the board you know they would want to do that I'm sure fairly soon.
Other thing is to keep capital to the extent, we can and then perhaps once we have some clarity.
In terms of where the economy is going.
It might be time to reinstate keeps what we did this year in terms of perhaps buying some stock back.
Okay and is there a kind of targeted capital ratio or level you are looking to.
Well not not the short term situations we just.
Like I said within the next six to nine months.
We just want to hold onto what we have and we like to use them. The capital. If we can and then if it is the methodology allows us to is to somehow to reserve a bit more.
So as we go along that.
When the economy is cleared.
The lending is not a hard hey, Dan we obviously with what we'll be doing things that stuff.
That's probably.
More more progressive at this point in time.
Yeah.
We wanted to be.
Treating safety is our number one issue.
Yeah understood Okay.
I appreciate the follow up.
Okay.
And ladies and gentlemen at this time, we've reached the end of today's question and answer session I'd like to turn the floor back over to the management team for any closing remarks.
Well thank you so much.
We're very lucky too.
A question was asked was about capital planning.
I mean, we can afford to be more conservative as we're very lucky to be able to have a purpose.
In this quarter and certainly we would be putting a full full attention and managing.
All our sales okay. Thank you.
And ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines.