Q4 2022 Preferred Bank Earnings Call
Okay.
Okay.
Good day and welcome to the preferred bank fourth quarter 'twenty to 'twenty two.
Earnings Conference call, all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on a touchtone phone to withdraw your question. Please.
Press Star then two please note. This event is being recorded I would now like to turn the conference over to Jeff House of financial profiles. Please go ahead.
Hello, everyone and thank you for joining us to discuss preferred bank's financial results for the fourth quarter ended December 31, 2022 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.
Officer, Johnny to management will provide a brief summary of the results and then we will open up the call to your questions. During the course of this conference call statements made by management May include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, such forward looking statements are based upon specific assumptions that may or may not prove correct.
Forward looking statements are also subject to known and unknown risks uncertainties and other factors relating to preferred banks operations and business environment, all of which are difficult to predict and many of which are beyond the control of preferred bank for a detailed description of these risks and uncertainties. Please refer to the S. E C required documents the bank files with the federal.
Deposit insurance Corporation or FDIC, 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 thank you, ladies and gentlemen for attending our earnings conference.
I'm very pleased to report that we have another record quarter of earnings for.
Fourth quarter 2022, net income was $39.6 million.
$2 71, a share which compares very favorably.
Five quarter in prior year.
Because this increased earning power our board has announced a 28% increase in dividend in December and to be start to be payable in January .
Yeah.
Gross.
Interest income has outpaced the growth in deposit cost.
Consequently.
Net interest margin.
Mainly due to a $4 seven 5%.
For the quarter.
However toward.
Latter part of the quarter, we have seen that the deposit cost increase.
Right.
We believe so catching up and this process will continue into first quarter.
2023 at least.
Many of our customers are continuing to manage their money by moving.
Total deposits from lower cost or high cost and then we see the market continues to offer higher deposits nearly every day deposit costs every day.
Going forward to grow deposits at a reasonable cost.
A challenge and it will be a thing that we must do.
Sequentially this quarter as a net long into net loan increase of one 3%.
And the deposit increase of one 9%.
Deposit and loan.
Demand has to putting them all.
Modern way that since.
Third quarter up to a big 2022.
And we believe it will be.
Carry over well into the first quarter at least.
Yeah.
Our customers generally are finally, just more prudent.
In.
In our India operations and then.
And timna, especially from a new transaction when you initiate it committed.
Because of our high earning capability.
Liquidity.
And capital ratio both improved.
From the previous quarter.
And we believe our current liquidity level and capital level.
Ken.
Easily.
Sandal growth foreseeable closer to need.
In the year 2023.
Okay.
Benefited by D.
Biodiesel and then net interest income increase.
Oh.
Efficiency ratio came in at 26%.
Even when we can say they included a $1.8 million of Oi you items.
Going forward in 2023.
Expenses is expected to increase.
General wage inflation is the main thing.
The increase in crude FDIC.
Premium in your planning assessment.
Two new at least two new plant bank branches.
Some planned addition to to to SaaS and also a.
Fully upgradable.
S. P. A department that will be fully operative in 2023.
Our attention Seuss.
Early 2000, Twenty's 22, but I'm sure that you can see all my previous.
In our previous earnings release report now since through sound tonnage will be very focused on quite a matter of scale. I'm also pleased to report that both M. P. A N P. O N P. L has improved from the third quarter.
At December 31st.
Lower level than September 30th.
In fact.
In early January we have resolved another $5 $3 million or fully collected another.
$5 $3 million of nonperforming loans.
Effectively as of today, our December 31st nonperforming loans is only $200000.
And a very good early indicator of credit quality is our 30 to 89 days past due loans okay.
I'm also pleased to report at December firstly, but as far as the <unk>.
<unk> totaled only approximately $1 million.
Based upon a report published by Bank of America.
Our third quarter return on tangible common equity is 23.6%, which ranked second among all California public traded banks older too.
Dollars.
We believe our fourth quarter performance, well then does it.
Apart from the same situation at least.
Yeah.
Because of our bedroom spa model and because we our business bank serving business and.
By the clients.
Our model does allow us.
And this has really become a very low.
Cost deposit cost operator.
But however.
If you're at.
Non interest expense.
Two the deposit Charles which will give us the total cost of operation.
For years, we have been the lowest.
Oh.
Cool.
We believe I believe okay.
The high earning power.
The low effective total cost.
We'd be the best defense.
Uh huh.
Facing.
A recessionary economy.
We are optimistic about 2023.
But we'd be very careful.
Thank you.
I'm ready for your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press star.
Then too.
At this time, we will pause momentarily to assemble our roster.
Okay.
Okay.
Our first question comes from Matthew Clark.
With Piper Sandler. Please go ahead with your question.
Hey, good morning, gentlemen.
Hum.
Wanted to start on noninterest expense and clarify some of your guidance around the growth this year.
Assuming that excludes the Oreo related costs in 'twenty, two roughly $2 9 million, maybe you can speak to the run rate going forward and how do you think that run rate might progress throughout the year.
Well I dismiss ENSA bye bye thank you.
In our budgeting process, Yes, Hey, Matthew yes. So if we you know if we pull out the Oreo costs. In Q4, we were just just under $18 million on a run rate going forward at least for Q1, which is always a little bit of a aberration for us because of certain costs. In Q1, we're looking at probably the low end at about 18 point.
6 million high end, just under $20 million in terms of noninterest expense.
Going forward from there it will probably be somewhat similar although you'll have a slow ramp right in terms of the growth in noninterest expense.
Yep got it.
Okay.
Then.
Shifting.
To the margin.
Do you have the spot rate on interest bearing deposits at the end of the year.
Yeah.
Total interest bearing deposits not at the end of the year, but for the month of December were 2472 0.47.
Okay.
Okay and do you have do you happen to have any since you have the average.
For the month of December you have the average margin in December .
Yeah the margin for December was 4.83.
Okay. Thank you.
And then just on.
The overall outlook on <unk>.
Interest bearing deposit costs heard your comments.
Comments earlier, Mr. You about things.
<unk> toward the end of the quarter.
How are you what are your thoughts on.
Where your beta might settle out through the cycle, assuming we get a.
Another 50 basis points from the fed here and we're done.
Relative to last cycle I think what you were in the mid fifties.
Yeah well.
My thoughts is that from my message is that we will continue to see the market competitors are paying more interest and we as a small in the big pop would just have to follow that.
Trent and approximately the same thing and hopefully that.
And tried to manage it more closely stage now.
Actually you'd be surprised some of them are largest institution back in November before December rate race, they already offer in one.
I mean like a certificate deposit at 5%.
And I can list a whole list.
Gathered that so going forward is these big institutions.
The market Rebase, the set market improving pet we just tried to catch up and we have no idea.
What they would do so long, but based on my experience is I think definitely first quarter. The deposit cost a further several rate increases as compared to fourth quarter and then a margin you know what.
In my opinion.
It is not.
Okay.
In the second okay.
And while obviously margin yourself has to do with the leverage to depending on how much Wilson owns.
Much mostly positive but in general the spread I think is the amount of time.
It's tempting in fourth quarter for them.
Okay. Thank you.
Not to say in this first quarter will not be able to earn a very handsome margin you know.
Yeah.
Our next question comes from Andrew Terrell with Stephens. Please go ahead with your question.
Hey, good morning.
Good morning, Joe Moore.
I wanted to.
I'll start on just deposits specifically noninterest bearing.
I look I think your mix is around 'twenty, one 'twenty, 2% noninterest bearing deposits.
As a percentage of total I'm, just trying to get a sense of I guess, what youre seeing so far in one queue in terms of noninterest bearing deposit flows and what your sense is on where we could see noninterest bearing deposits.
Mt.
The answer is we don't know that's one of the reason why you can see we have no control of my margin going forward.
Because we see customers continuing to manage their money they either pay off their lines are they just reduced their loans saving because costs all in many cases, where a customer using the excess cash to pay off their <unk> real estate loan because they consider you know, 8% seven habits and unbearable.
So this trend will continue and this is also with that.
More people will recognize that their money.
You know.
Although 4% now they want to move to P. C diesel or other things. Okay. So this kind of movement.
I tried to look at other pressure, even as big as J.
J P Morgan.
Okay, well, what its migration process would be so this is one sector situation. Another one situation I can never tell how the big bank set their price situation and become the main competitive for deposits.
<unk> market share. So we just have to follow.
A lot to do with Dell funding condition or the overall tightness about to flip phone.
So this is really the very important.
Importantly, why Cogs into.
Into 2023.
Yeah understood I appreciate the color there.
Maybe if I can move over to just outlook on provision.
Provision.
Moving forward I guess, how are you thinking about allowance levels moving through 2023.
Well.
Our general philosophy is we had been building up a reserve at the U M.
We would take every quarter take a look and generally stay conservative take a look to see where that number is from the inquiries on EBIT stayed it stayed approximately the same of course, that's just subject to D. C. So methodology.
And so some of them since June <unk>.
Cocky elation clauses.
And generally speaking if we base on the credit metrics as of now.
I have to say well all the reserved.
But we don't know what the economy will be so we stay at the level I understand some of our direct competitor as reserve lesson.
90 basis points, Okay that today I do the same type of business as we do but.
We believe that we need to be stay at this level at all.
Yes.
Okay.
Maybe sticking on credit I'm, just looking at loan yields pallet.
Just south of 7% in the fourth quarter, obviously really good for the margin but.
I guess any color on how that service coverage profiles have changed your borrowers just given the increase in <unk>.
Loan yields in any loans that you have.
Had to restructure as a result of rising rates or any that you foresee having to restructure just any kind of incremental color there would be helpful.
Well I have Nick answer that first and I add up to it I'm not sure.
Andrew This is Nick speaking and flower DDR, we only have two small loans.
R T outlets combined with only a $1 5 million yes.
As belonging to one relationship and they are paying ever since some salt Kay and Oh definitely for fats repair increases and all Barbara I believe but they do have some pressures all our debt service coverage ratio side. However, most of our long. So we have a very strong financial.
Strong sponsorship behind it and then you can see from our past you report Yeah. We don't we don't have that many of our Paas U.
Under a 30 to 90 days and also a nonperforming loan we only have one mortgage warehouse, which you mentioned previously is only a 2.2 hundred 80.
<unk> thousand and around that's it so basically are our credit quality is still quite stable comparing to our.
Previous quarters, and we expect that to be the sea change and that definitely there are still many many <unk>.
Economy, uncertainties ahead of us in that 'twenty, two 'twenty three such as Oh.
Honorable adage off with supplies inflation cause a weakening of the purchase powers and the rep. He a rate increase and fast Q T side, all of those kind of things it really.
Ill give us oh uncertainties for this mark and the management continues to maintain a kind of a moderate risk posture for AR factoring a debt reserve requirements at this time.
Again this is pretty much that I've said this time if base our magic maintenance today.
Older reserves, Okay. That's my personal opinion, but however in general.
We have been trying to consider the recessionary economy, what the effect would be okay.
So.
Okay.
I appreciate you all taking the questions.
Our next question comes from Gary Tenner with D. A Davidson. Please go ahead with your question.
Thanks, everybody good morning.
Questions first on the commercial construction segment relatively small, but it had a couple of quarters of decline before increasing this quarter on our inter period basis. Just wondering if you could talk about Canada.
Committed pipeline that might fund over the course of the next year and if there is does that number just the period end number continue to trend downward as the fourth quarter a bit of an aberration there.
Or anything else to think about.
Nick will give you more color on that but somebody fluctuation here then is because in the past pandemic slowed down many of the projects. Many of you says is it restarted and obviously the summer time has been the greatest time to English.
Okay. So yeah.
Yeah, our construction portfolio, we're trying to manage this portfolio under a.
10%, Okay. During the past quarters, I believe is around 8% and this quarter it dropped to a.
A little bit dropped below 8%.
And just give you a little bit more color on our construction loans, because we don't do many of our construction loans, which is not a desirable products most of our construction loans actually.
From the existing loans, and we're trying to slow down a little bit, especially for those Congo project, those kind of listings and because of Oh, there's a lot of uncertainties in the economy. So we try to slowdown however, all all of our construction loans at origination we try to base.
Re increase projections to have interest reserves. So we are we're doing construction very conservative compared to our peer groups.
Okay. Thanks, and then a question for Ed.
There's obviously a lot of conjecture out there in terms of what happens to rates how long they stay at elevated levels when the fed does start tightening.
Just wondering given you know the amount of progress you've made in terms of asset yields you know year to date or in 2022.
You know any any updated thoughts on how you might kind of manage the balance sheet to lock in some of those benefits.
No.
Looking forward to a timeframe, where the fed does start to cover it.
Well I don't I'm not going to speak for the production side, but I know we have had a lot of discussions around as you know Gary about 80% of the book is floating rate. So there hasn't been a lot of discussions around and.
Making headway into doing some more fixed rate lending at this point at this time given the.
But the overall level of interest rates. This would kind of be the opportune time to start doing more fixed rate lending. However, that's still presents a challenge obviously as we've talked about already.
The activity has slowed down economic activity has slowed down but I.
I can let you know the SKU you want to speak to more on that well I see.
And overall fund management situation, we have most of the floating rate loans in fact substantially all of affordability has a floor.
The floor, so that protects us.
From the from the fluctuation.
Okay.
<unk> caused by the Rachael Ray situation.
And obviously that doing this there is high interest rate.
Great time.
It will be.
Sometimes adventure advantages to do selected a few fixed rate loans.
But the floor really puts us in a situation.
I mean that we can we can have time to adjust.
Along with our rate interest cost rate decreases.
So going forward that.
We just had quite every step of wages going up we build up the sensitive balance sheet.
Just as a follow up to that just sort.
To the degree that you know you've got new loans and working through the pipeline, which as you pointed out I mean, that's slowed down dramatically.
Your custom.
Customers.
More interested in <unk>.
Alright loans, because the customer has a sense that rates are going to fall quickly.
Is that kind of the general view of your customer base that they think that that will pivot quickly.
Quickly to the downside.
Customers are probably more interested in just stay as a floating rate loans.
Because we do I presume you're talking about real estate.
Okay.
Because they for CAD default stupidly listen to forecast by.
All the economists was indicating that we will come down later this year or early next year and to them. It's just a short term situation.
Alright, thank you.
Yeah.
Our next question comes from David Feaster with Raymond James. Please go ahead with your question.
Hey, good afternoon everybody.
All right.
I wanted to touch on some of the expansionary plans that you touched on early early.
In the call, maybe specifically starting with the SBA Department just curious the plans for that whether your plans are to retain our production or sell it maybe the timeline for the build out and and maybe where youre going to be focused from a regional perspective.
Okay. SBA Department was started latter part of 2022nd with a skeleton crew.
And then we are going through to be getting a PLP position will never be in a preferred lender before so.
So we expect the P. O P position will be granted early part of this year, okay. So as far as the plan, but we will return.
He came to something like that why don't you want to answer that.
Thank you Mr Yu.
David R.
Our plan is to as.
As we fund our SBA loan, we will just sell it to a secondary market.
Okay. Do you have any early do you have any early expectations in terms of production or is it kind.
Kind of a wait and see.
It's a wait and see especially with turn the economy turns.
Yeah.
With the.
Recessionary.
Economy, SBA tend to slow down a lot of people actually you know the market has slowed down.
No. We're just looking at the two.
All about.
Methodically and.
No. It's just very very careful synthesis that new product that we have although we have experienced team and the team leader.
Sure. So you've got a tailwind on the fee income side, but wouldnt expect a huge contribution this year.
Yes, Sir Okay, and then maybe just touching on the branch expansion side. Just curious is are the branches are part of the Texas expansion and knows L. P. O is and maybe if you could just give us an update on on where we are in Texas, how growth in demand and our pipelines are trending there.
Texas is going to be converted into a branch within about LP.
<unk> appeal to a branch in about two months.
I know, we're all busy working on.
Thanks, Okay.
The pipeline does not change that much from last year to this year.
Standing so in fact, we currently are in the in the in the situation in top bankers looking at things very carefully.
Ah another branch or we have signed a lease I think we need them aside and a new committed okay.
It will be in the southern California in a very good location, we're working very close on that but we have budgeted it already that's what I mean.
So.
Going forward.
And the remainder of the year's if new opportunities come up we just rabbit.
If does a new personnel that to be hired.
We're not gonna be worry about its budget, we're just gonna hire them at all.
Yeah.
That's music to Ed's years.
And so I guess the other thing is I wanted to touch on is you guys have been very good stewards of capital and you have a very strong capital position ahead of a potential credit cycle, but.
But you know if we step back and think about a potentially slower pace of loan growth and your incredibly high levels of profitability youre going to be accretive capital.
Really rapid pace.
You know we talked about a couple of growth initiatives I'm just curious about your capital priorities here, we've seen some dividend growth and and you know again carrying significant levels of excess capital into a credit cycle is not a bad thing, but just was curious whether there's any appetite to increase capital return.
Or other capital priorities.
Thank you for asking the question recognizing all of that okay.
Because we have a state chartered bank reporting I mean without a holding company.
Capital raising is required I can't put a buyback capital transaction.
Required shareholder approval, which is required by the state regulator.
So.
Every time, we want to buyback some stock if we wanted to go through the whole process. That's nine months nine months process.
So this year, we're going to do is we just got the board approval.
Two two.
Two to submit for shareholder approval doing a proxy season.
For approving pre approving a total amount of stock buyback.
And then we'll go to the state whenever were ready to do a comeback in generally speaking is that the majority of tenure in our opinion all the board is that at the beginning of the year, we need to be a little bit more careful and watching too what.
What can be watching the economy.
The capital ready if the economy for some strange reason turns out okay. So once it is clear then we expect to return things towards shareholders.
That makes complete sense terrific guys I appreciate it.
Sure.
Our next question comes from Tim Coffey with Janney.
Please go ahead with your question.
Great. Thank you good morning, everybody.
Okay.
Yeah, I had a question about the cash on balance sheet.
So it still remains at elevated levels and I'm wondering does the uncertainty about customer liquidity behavior outweigh the opportunity to reinvest that in securities.
Well, that's a very good question as you know.
No Tim we have kept.
Inordinately large amount of cash on the balance sheet actually since the financial crisis. So we've always had a fairly large cash position.
One thing we actually did do during the fourth quarter is we did invest some of that excess cash in the treasury market.
Where what I consider to be extremely attractive yields and I think we may do some here in the near future.
In order to lock in some of those some of that additional yield rather than half cash flow along with the fed's interest rate decisions.
Okay. Okay.
That's helpful.
And then just.
Curious about what youre seeing from competitors clearly your customers who started the express some cautiousness in terms of our lending behavior. I'm wondering are your competitors are you seeing them pull back from the market or otherwise tightened their credit boxes.
Well first of all strangely enough the whole like us they are looking for opportunities, but they are very prudent okay.
But there are competitors doing things at this point in time, which require us to researching too with today. There was a one of the larger bank in California is offering steel often customers are 70 years fix.
Fixed rate.
Okay.
Loans at low, 6% very low 6%.
And was that prepayment penalty, so theyre willing to grab business for giving the the interest income. So we're looking at that we lost a number of accounts to them, but we're still looking at that and to see how we can how we can compete with these kind of situations I guess, there's always going to be.
No I should say people that you cannot compete with we lost their lives alone to the say to a credit.
Credit Union, five and quarter for seven five years, which.
It's fixed rate.
Just can't compete okay.
We had some things every day.
Okay, So youre still seeing irrational activity okay.
Alright, great. Those are my questions. Thank you very much.
Okay.
Okay.
This concludes our question and answer session I would like to turn the conference over to Li Yu for any closing remarks.
Well actually it.
The question I'll ask is all pointing that those things will go further trader sides. So thank you very much for you all for your time and as I said.
We're optimistic that.
I would be careful.
Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.