Q2 2024 Preferred Bank Earnings Call
Okay.
Good afternoon, and welcome to the preferred Bank second quarter 2024 earnings Conference call.
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At this time I'd like to turn the floor over to Jeff Haas of financial profiles. Please go ahead.
Okay.
Thank you, Jamie and Hello, everyone and thank you for joining us to discuss preferred banks financial results for the second quarter ended June 32024 with me today from management are chairman and CEO, Li Yu, President and Chief Operating Officer, Wellington, Chen Chief Financial Officer, Edward Shake out at <unk>.
Credit Officer, Nick Pi 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 1995.
Forward looking statements are based upon specific assumptions that may or may not prove correct.
Looking statements are also subject to known and unknown risks uncertainties and other factors relating to preferred banks operations and business environment, all of which are difficult to predict and many of which are beyond the control of preferred bank for a detailed description of these risks and uncertainties. Please refer to the SEC required documents 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.
All over to Mr. Li Yu. Please go ahead.
Thank you very much first of all I'd like to applaud apologize to all of you for pulling you away from the opening ceremony.
And thank you for attending the conference.
I'm very pleased to report that.
<unk> bank's second quarter net interest income was $33 $6 million or $2.48 a share.
This quarter, we have an annualized 8% loan growth.
The annualized 5%.
Gross.
For the quarter.
We have a $9 million.
Charge offs.
The charge offs are related to the loan that was previously fully reserved as of the previous quarter.
And we had an increase.
And nonperforming loans of 22.
Milling dogs.
I have included some details.
Our press release for your information for your review.
We believe.
These M. P. A's are either fully reserved all are adequately protected.
Protected.
Hi.
The collateral.
And the resolution of these nonperforming loans will not likely.
Cause any.
Significant impact to our future.
Yeah.
It's worthwhile to point out.
The route.
The loan losses came from the pool of criticized loans.
This actually has reduced its $13 million from the previous quarter.
And the migration pattern.
So seems to be.
True.
Okay.
We have always been fairly consistent with all the.
Operating non interest expense.
Non interest income.
Going forward.
I'm not seeing any significant changes to these factors.
And we.
We have been.
Working.
To reduce the asset sensitive sensitivity.
Of our balance sheet.
We believe we're not far away.
From what we see as the optimal level for us.
And.
Speaker Change: The much anticipated or hoped for.
Interest rate relief.
Well not likely causing.
Secondly convention effects to our future income statements.
Speaker Change: Yeah.
Yes.
A year ago.
Speaker Change: The bank announced a buyback program of $150 million.
For the past 12 months.
We have repurchased.
Speaker Change: Me too.
Millions of dollars.
One common stock.
Speaker Change: Yes.
The regulatory approval for the program has expired.
We have we are now seeking for.
Paul Reapproval, all extension for us to be able to.
We purchased the remaining 77 million.
Speaker Change: Yes.
I'm pleased to report.
What is the 72 and a half million dollar repurchase.
Speaker Change: What is the $2 80, a share dividend.
It was a reasonable growth.
Loan and deposits.
Thanks.
Okay.
TCE ratio actually improved by 53.
<unk> points.
Just as we had planned.
We attribute this to.
Speaker Change: The bank's earning capability.
Speaker Change: Thank you very much.
I'm ready for your questions.
Ladies and gentlemen at this time, if you would like to ask a question you May Press Star and then one using a touchtone telephone.
Speaker Change: If you are using a speaker phone, we do ask that you. Please pick up the handset prior to pressing the keys to withdraw your question you May press star into.
Once again that is star and then one to join the question queue. At this time, we will pause momentarily to assemble the roster.
Our first question today comes from Matthew Clark from Piper Sandler. Please go ahead with your question.
Hey, Thanks, good morning, everyone.
Speaker Change: No.
Just one on the margin.
Speaker Change: Okay.
We've got the adjustment for the interest income reversal, but.
Do you have the spot rate on deposits at the end of the end of June and the average NIM in the month of June excluding excluding.
Excluding that reversal.
Yeah total so the margin for June 389.
Speaker Change: Matthew.
And total cost of deposits is 408, that's been consistent for a few months now so I think where we've hit the eight types there.
Okay. So the four O AIDS for the month of June.
In total.
And a 389 includes that 11.
Basis point reversal.
No it does not that did not happen.
Right.
Okay. Okay.
Thank you and then your commentary about being you know Richard I'm, sorry, reducing your asset sensitivity can you be a little more specific at this stage you know how much of your portfolio has floors.
Speaker Change: Where are they and and how would you be yourselves.
Speaker Change:
With with each with each 25 basis point rate cut.
We have a detailed analysis later on we can provide you with but in general I like to say that during the past 12 months or maybe as much as 18 months.
We haven't reduced.
Floating rate loans.
The fixed rate loans, we have increased from 11% to right now approximately 25%, okay. So deep.
Floating rate assets are fairly long so as to reduce like website.
About 14% okay.
Speaker Change: So.
This is actually what we have done in order to compete.
Turning to our balance sheets.
Sensitivity of our liability for days and you can see that we are in general a pretty balanced position.
Yeah.
Okay, Great and then.
On expenses, maybe for Ed for you Ed.
It looked like there was a comp accrual reversal here into Q just can.
Can you quantify that and then.
Give us a sense for the run rate going forward here in the second half.
Well in terms of noninterest expense, we came in a little lighter than I think what I had previously guided to we had a a decrease on the salary and benefits side.
Primarily due to.
Payroll taxes on the.
On the bonuses are incentive compensation, which is paid out every Q1, so going forward looking at it I would still keep the same guidance between 2020 and a half Matthew.
Okay.
Matthew: Thank you.
Okay I'll leave it there, let others ask questions. Thanks.
Speaker Change: Thank you.
Our next question comes from Andrew <unk> from Stephens. Please go ahead with your question.
Hey, good morning, and thanks, math, obviously down here.
Speaker Change: Yeah.
Can you talk about the $18 million of hotel loan and then you mentioned, a 15 or a 51% L. T V.
Can you just talk about when the last appraisal or valuation came out on this property.
Uh huh.
I think the valuations are a little bit over a year ago when the rate wouldn't.
Hotel property is still undervalued, but value because that can be improved.
The reason that I want to say to you is.
You know we had unfortunate partly the cards in the partnerships fight.
There is a money partner almost 99% of ended.
Work partner, almost 1% and two of them obviously, many dia together they are starting to fight with each other and the money time, I really want to buy D, 1% off and.
Obviously that the data does not.
Does not make so both side is taking that position.
We're not a cruise is positioned Monday undertakes and therefore, we're fully expecting to redeemed the properties.
Ft foreclosure date.
Okay understood.
Understood and then.
If I could just ask on the kind of asset sensitivity position here you on are they kind of 75% floating and that makes us obviously.
Hum come down so helps for future rate cuts, but the the cash position any interest in taking some of that in fixing it in the bond book I, just looking at the forward curve with.
Speaker Change: Several rate cuts on there right now.
I I would've I don't expect we would do anything dramatic Andrew there may be a point, where we want to put some money to say it to work here, but I wouldnt expect a massive investment in anything we do like keeping both sides of the balance sheet relatively short so.
Andrew: Yeah makes sense.
Any thoughts on kind of incremental I mean, your loan growth was pretty solid in the corner. What are you seeing from a borrower demand standpoint, and how should we think about loan growth in the back half of the year.
Andrew cannot take a little bit more time to answer that question. So you know first of all you know in the first quarter when the country has a flaw believed the six cuts okay.
We see the loan demand actually goes up building many people want to commit to new investments.
And these loans come to fruition in this set.
Quarter, usually it takes about three months to get deals done.
Andrew: And then the second quarter when the country believes that no pain no rate cuts will be run when the demand is.
<unk>.
So we I hope we are seeing the possibly at the end of third quarter demand growth would be.
Ltd.
Andrew: And although we are working with our engines opex.
Andrew: Tried to work hard to try to get more loans, but.
The demand is not as high as the first quarter.
We are now anticipating rig cuts again, we think that's the end of fourth quarter likely that would be more increased loan production.
Yeah.
Okay, So maybe a little bit slower near term, but to the extent that rate cuts start to come in maybe improvement late in the year end of 2025.
Yes, we do see that as rate cuts are happening, we'd like to think okay and getting closer to our historical.
Gross rate.
Very good okay. Thank you for taking the questions I'll step back.
Thank you.
Our next question comes from Gary Tenner from D. A Davidson. Please go ahead with your question.
Gary Peter Tenner: Hey, good morning.
And.
Hoping you could provide some of the data on both loan floors say after 50 or 100 basis points of breakouts.
Sure. So right now Gary about 21% of the floating rate loans, well first off 98% of the floaters have floors, so put that out there.
Gary: And then of that 21% of that is within 100 basis points or 79% is outside of 100 basis points of cuts.
But that is that is that as moving as you can imagine and that are the 21% number continues to grow each month as loans are renewed.
Got it thank you.
I guess the natural either side of that question is just updating maybe the third quarter and fourth quarter, CD maturities and kind of where your renewal rate sits right now.
Yes, Q3, we have about a little under $1 2 billion maturing.
In Q4, we have just almost exactly 1 billion maturing those are at average rates right around 5%. Each so we would expect some some relief in the coming quarters as rates have started to come down.
Great. Thank you.
Yeah.
Our next question comes from Eric Specter from Raymond James. Please go ahead with your question.
Hey, this is Eric in for David Feaster, Thanks for taking the questions.
Wanted to touch on the deposit side of the coin and get a sense of trends in the quarter, especially and I'd be in core deposits trended later in the quarter end of <unk> you.
Thoughts on core deposit growth.
Grocery is going to come from existing clients for success on new client account growth.
That would be helpful.
Okay.
Sorry, you're going to have to repeat the question a little bit [laughter]. It was hard to hear a little bit of that please.
I'm just wondering on on the deposit side of the coin whether you can get a sense of just trends in the quarter.
What was the drivers of core deposit growth you talked about how it's shaping up early in <unk>.
And if you expect growth from existing clients.
Speaker Change: What are you having success, attracting new client account growth.
Alright, I'll I'll take a stab at it here first off on the noninterest bearing that appears to have leveled off in terms of what we've been seeing trend wise.
In terms of the decline on the noninterest bearing.
That seems to have reversed itself in June the <unk>.
Growth for the quarter is attributed to core deposit growth as opposed to brokered or institutional deposits.
Pricing seems to have as I indicated earlier pricing seems to have flattened out or is basically at the kind of the apex in terms of.
Our own cost of funds.
And then going forward as you know it's difficult to predict deposit growth.
Going forward, but I would venture to say because of what we're doing.
From a tactical standpoint, new offices, and new officers I would like to thank the majority of our growth going forward will be from new clients as opposed to existing clients increasing their balances.
Got it that's helpful and then interest bearing demand balances seem to increase pretty meaningfully you talk about whether that growth is from existing clients here.
That migration.
Curious what what rates are there.
I'm sorry.
I didn't get the question again, I'm, sorry, I know, it's noninterest bearing deposits. So I'm, having a hard time hearing you.
Yes.
But it just is it better now.
Yes.
Speaker Change: Interest bearing demand.
Deposits it seemed to increase pretty meaningfully during the quarter. Just curious if that growth is from existing clients or new account growth or whether that is migration and just kind of curious what rates are there relative to the portfolio.
That's a combination of both.
We do we do see obviously people moving from noninterest bearing to interest bearing due to the rate environment.
Although that as I've said that migration pattern seems to have slowed down significantly.
Got it.
And then lastly, just on capital priorities, and then I'll step back been active repurchasing stock.
Increase the dividend this past year.
I'm just curious how you view buybacks.
In light of your improved currency I'm just curious.
Your thoughts on further de Novo expansion opportunities and just kind of general commentary on capital priorities.
Well.
As always has been the case for US our primary focus first on capital allocation as organic growth.
Second dividends.
Third buyback enforce would be anything us from a strategic standpoint, and I don't think that's really changed at this point.
The repurchase we did.
Most of it occurred during 20 latter part of 2023 at an average price of just under $60 with where we're trading at today, we're going to be a lot more circumspect about going forward on the repurchase.
Hello are you there.
Hello.
That's helpful. Thanks for answering my questions I'll step back.
Once again, if you would like to ask a question. Please press star and one.
Our next question comes from is a follow up question from Matthew Clark Piper Sandler. Please go ahead with your follow up.
Hey.
Matthew Timothy Clark: Just wanted to ask about the net charge offs and you know.
Matthew Timothy Clark: How much of that 9 million.
Was related to those two C&I loans it seems like that's where the losses were incurred.
I know they were previously reserved against but just wanted to get a sense for how much of that was tied to those two loans and if you could.
Give us some more color as to the types of credits those are.
Other than being C&I and kind of what the resolution.
Process looks like.
What the charge offs.
Roughly $75 million of the $9 million related to these.
C&I loans okay.
And.
So basically that the charge offs.
Okay.
Okay.
Well I guess it wouldn't.
Women was related to a previously resolved real estate loans.
Okay.
But they're the types of the business I guess that these two businesses that these are related to I'm, just trying to get a sense for what types of it now is these are.
It's not related to.
That fast.
These two business.
Okay.
Okay.
Sounds good and then just back on them.
The question about the CD.
Repricing and kind of what's coming up for renewal by the RIN.
Newell rates, 5% or that's what they're maturing at I'm trying to get a sense for kind of the differential.
Yeah, no they're maturing at five.
And as we see market rates and our offered rates start to come down that's why I think we're as I said, we're at the apex here.
And what's your current offering rate, but where where where are they starting to renew this quarter. This month.
It depends on the terms.
It goes anywhere from the east threes up to up to five but that's a longer term and that's not a not picked by our clients.
Okay.
Sounds good thank you.
Yeah.
And our next question is also a follow up from Andrew Charles from Stephens. Please go ahead with your follow up.
Andrew Charles: Hey, Thank you yeah, if I could just follow up again on the C&I charge offs.
Take another stab just can you talk to what specifically drove no I guess the deteriorating fundamentals of the companies for the loans that you charged off just trying to get a better sense of.
Kind of what happened there.
Okay.
Well.
Mitch do you want to take that question.
Yes.
Mitch: This too crowded actually a well.
There won't be a tissue be Osama recovery out later on because we are waiting for some of the mitigation process. Okay. So one of the one of the long, while we have arbitration, a pretty sudden and either third quarter or early part of fourth quarter. So are the loan fully guaranteed by individual guarantor with regards strong financial.
Conditions. So that's one of them and you have to Oh. So all we're doing we do have to judge him on this credit.
And Uh huh.
We're doing a post judgment examination at this time, so hopefully for both of them or we can get some recovery from the quarters.
Got it.
As you can see where charge offs.
I mean, we have.
Fully reserved obviously hopefully that.
That does.
The legal.
Mitch: Proceeding has produced some results for us.
Okay. Thanks.
Thanks for the question.
And ladies and gentlemen at this time in showing no additional questions I'd like to turn the floor back over to management for any closing remarks.
Thank you very much.
Thank God.
I must speak for.
Many many many of our customer industries customers and we hope that the.
Finally, there will be.
There will be.
There'll be a rate cut soon and I personally that I do see your doctor.
That did.
The fed has not been proactive in the rate increases and a lease issue learned their lesson to be.
Proactive on their on their rate reductions.
And I mean so.
Speaker Change: It is only a hope maybe it's a prayer.
I think many of our borrowers.
Deserve to have lower interest rate.
Thank you very much.
Yeah.
Ladies and gentlemen, with that we'll conclude today's conference call and presentation. We do thank you for joining you may now disconnect your lines.