Preferred Bank (NASDAQ:PFBC) Q1 2024 Earnings Call Transcript

Preferred Bank (NASDAQ:PFBC) Q1 2024 Earnings Call Transcript April 23, 2024

Preferred Bank isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Preferred Bank First Quarter 2024 Earnings Call. All participants will be in listen-only mode. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Jeff Haas, Financial Profile. Please go ahead.

Jeff Haas: Thank you Nick. Hello everyone. Thank you for joining us to discuss Preferred Bank’s financial results for the first quarter ended March 31, 2024. With me today for management are Chairman and CEO Li Yu, President and Chief Operating Officer Wellington Chen, Chief Financial Officer Edward Czajka, and Chief 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 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 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 in the bank files with the Federal Deposit Insurance Corporation, or FDIC. If any of these uncertainties materialized 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.

Li Yu: Thank you very much. Good morning. I’m very pleased to report that Preferred Bank’s first quarter net income of $33.5 million, or $2.44, the fully diluted share. This quarter, our loan growth was annualized at 4% and deposit growth was 6.5% annualized. This quarter, our net interest margin is 4.19%, which is a slight decrease from previous quarter. Looking ahead, the second quarter, NIM, likely will also compress, but we don’t think it’s going to be very significant. It’s going to be mild compression. The reason for the compression in the first quarter is continued increase in cost of deposits. As of March 31, total criticized loans is $87.6 million, which is $3.6 million higher than the $83 million at year end. I know there’s a mass mistake somewhere, but you have to round off three numbers.

And non-performing loans has reduced from $28.7 million at year end to $18.2 million in the first quarter end. This quarter, we have a charge-off $3.5 million related to loans that previously identified with lost content and fully reserved for them. This quarter, our provision is $4.4 million. The reserve allowance now stands at 1.49%. On the business side, we have just opened a new branch in Orange County, Irvine area. This is a full service branch staffed with a team of deposit personnel and a team of loan personnel. We also practically, as a right now at this minute, open up a Sunnyvale [ph] loan production office in the Silicon Valley area. And we plan to continue to add relations with personnel in the remainder of the years. Since third quarter last year, we have been trying to reduce the sensitivity of our loan portfolio.

And as of today, we believe it’s a much better balance with our deposit composition. With the current change is a trend of interest rate movement, we will obviously monitor the situation and making the necessary adjustment to control our interest rates risk even better. Thank you very much, and I’m ready for your questions.

Operator: We will now begin the question and answer session. [Operator Instructions] The first question comes from Matthew Clark with Piper Sandler. Please go ahead.

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Q&A Session

Matthew Clark: Good morning, everyone. Maybe, Ed, just to start on the NIM. Trying to get some visibility in the 2Q, if you had the average NIM in the month of March? And the spot rate on deposits at the end of March?

Edward Czajka: I was ready for you, Matthew. The NIM for March was 411 [ph]. Spot rate on deposits was 404.

Matthew Clark: Okay. And that 404 was at the end of the month? Or was it the average in March?

Edward Czajka: That’s the average for the March, yes.

Matthew Clark: Okay, got it. Okay. And then, I think you all hired some producers in the fourth quarter. And you had some good growth in both loans and deposits. Want to get a sense for your pipeline of loans and deposits and your growth outlook for the year?

Li Yu: Well, first of all, I don’t think we have had too many people in the fourth quarter, but also on the first quarter. You know, when you add the relationship officers, usually it takes about one and a half to two quarters before they can materialize into — before they start to materialize. And also, as you probably know in our business that for every 10 people you hire, you hope everyone works, but not necessarily, okay? But we just, hopefully, there will be some stars that balance out the whole situation. With the pipeline, and one of the things you want to explain the pipeline first?

Edward Czajka: Well, thank you, Mr. Yu. Matt, our pipeline is pretty healthy. I think that we are really, as Mr. Yu mentioned, really focused on taking care of our existing customer. And right now, there’s quite a bit of opportunity for them. And that’s our priority. So, in turn, yes, that’s what we are. The pipeline is pretty healthy.

Matthew Clark: Okay. And then the — sorry, the other question I had, I think was, yes, around the CD repricing. Can you just remind us what you have coming due over the next couple of quarters in the rate differential and when that gap might close completely?

Edward Czajka: Yes. So, we have Q2, TCDs of about just $100 billion maturing there at an average rate of 4.9. So, we don’t see a lot of differential there with respect to what’s going to be maturing with respect to what’s going to come back on. Q3, that number dips a little bit to $374 million in terms of maturities. So, we don’t expect a lot of movement in the standpoint on the deposit side from TCD rates going up dramatically from the portfolio rate that we’re at right now.

Matthew Clark: Okay. And then just on credit, can you remind us of the non-performer that you’re able to sell at par? What type of credit that was? Obviously, great to see. And then just the incremental increase in criticizes. I know it wasn’t a big number, but just I would like some color there?

Li Yu: Well, obviously, these things are coming in and out and has a different time and different stages of law. Some of those criticized loans will migrate into the non-performing area. And we have, obviously, it is our job to identify them in the very early stage to provide a proper reserve on the whole situation. Okay. So that the loss content has been accounted for and will not be affecting the future years, okay? So, what’s your question, Nick, you have anything to add?

A – Nick Pi: No, really. Just to give you a little bit more color about those two loans related together. We sold the note at the par plus a little bit, small premium on that. So, just like Li YU mentioned, it’s migration in and out for credit. So, I believe we didn’t notice any significant trend of credit side.

Matthew Clark: Great. Thank you.

Operator: The next question comes from Andrew Terrell with Stephens. Please go ahead.

Andrew Terrell: Hey, good morning.

Nick Pi: Good morning Andrew.

Andrew Terrell: My first question was around just the loan yield expansion. You saw this quarter, seven basis points sequentially. It was up pretty nice. I was just curious, was there any outside interest recovery or anything like that? More one time in the in the 1Q loan yields or was this more just the function of loan growth and kind of churn in the portfolio towards higher rates?

Edward Czajka: Yes. Good question, Andrew, and good pickup there. We actually had a prepayment penalty on a fairly large credit in the month of March. A little over $200,000 and that helped to drive yields just a little bit.

Andrew Terrell: All right, just a little above $200,000.

Edward Czajka: Yes.

Nick Pi: Yes, these things happen in each quarter. We hope that we have some prepayment penalty in each quarter, although it was very interesting. I’m not trying to, it’s just –

Andrew Terrell: Understood. Got it. Yes, we’ll hope for more. I was looking at a comment from your earnings release around the rate sensitivity position and kind of some adjustments in the loan portfolio to maybe dampen out that sensitivity. But looking back at the annual report, I think you guys are disclosed down 7% to NI with negative 100 basis points in the short term rates. Has that moderated significantly as of the 331? Can you speak a little more to how the balance sheet is tempered in terms of rate sensitivity?

Edward Czajka: Well, it has tempered. I can’t give you the number right now on the down 100 scenario, Andrew. But suffice to say what Mr. Yu was alluding to earlier is a number of things doing a few more fixed rate loans than we’ve done in the past. And with respect to loans that are renewing or coming up for renewal, if their remaining floating rate were moving the floors up from where they were previously.

Li Yu: I’ll fix it with a situation. Now, I can give you a rough number right now. I cannot tell you exactly down 100 basis points and so on. We haven’t got a chance to do that. I think previously we disclosed to you, I mean, rate sensitive loans. It’s about 87%. I can’t quote you exactly. Now we’re down to about the mid 70% or maybe slightly lower than mid 70%. So if you compare to the sensitive liability we have, that we’re in pretty good balance right now.

Andrew Terrell: Yes, okay. Yes, the mid 70s is definitely a big move. That’s really helpful. I appreciate it. And then maybe one on the expense base. Just expectations on kind of the 2Q expense run rate. I know that its looks like maybe a new LPO opening. Just curious on how you see expenses trending in the second quarter?

Edward Czajka: So a number of things that Mr. Yu and Wellington alluded to. We have the new Irvine office, which is in a prime, prime location in Orange County in the Culver Center in Irvine. In addition to that, the Silicon Valley LPO, both of those require staff as well as lease costs. So I think going forward, I think the 20 million you saw this quarter is probably a fairly plus or minus going forward for next quarter.

Andrew Terrell: Okay. Very good. Thank you for taking the questions this morning. I appreciate it.

Li Yu: Thank you.

Operator: [Operator Instructions] Our next question comes from David Feaster with Raymond James. Please go ahead.

David Feaster: All right. Good morning, everybody.

Li Yu: Good morning, David.

David Feaster : You touched on the two MPAs. But I was hoping to get your thoughts on credit more broadly. You’ve got a track record of, you know, being aggressive managers or credit. I’m curious, what are you seeing more broadly in the health of your clients? Are you seeing any signs of stress and just any, you know, any thoughts on credit more broadly from your perspective?

Li Yu: Okay, let me state that from a, from a way back, you know, let’s say in 2022, okay, a little bit earlier, when we started to worry about the rates and credit and so on, and inflation and so on. If I had seen or thought that the, was this period almost two years gone by with the charge-offs we have and the loss we have had and the level of MPLs and the level of criticize assets as of today, I wouldn’t be so happy those days. But as you know that the one of the trick in dealing with credit is try to identify early and try to fully reserve that. Okay? So that’s our basic principle. But talking about what our customer is concern, most of our customer is started to turn a little more positive. And being basically obviously inflation is one factor that is down.

And another factor, the rate is stabilized, although everybody would like to see it down a little bit. But all we all know from this point of time, sooner or later, it’s going to be lower. It’s a matter of whether it’s half a year or one year or whatever. Sooner or later, we’ll be back on that. And from what I read for all the big banks reporting numbers, their credit posture is also better than expected and internally expected or what. Okay? So generally speaking, I think the marketplace is start to feel, see the light at the end of the tunnel. In fact, many of our more opportunistic customers, they started to thinking about new investments. I wonder if that’s all you have. I mean, any additional related to that?

David Feaster: That’s great color. Does that indicate that maybe you’re having a bit of, you know, maybe less cautiousness and maybe that we should see growth start to accelerate? It sounds like demand starting to improve. You alluded to improving pipelines. It seems like you strategically decelerated growth from the conversations that we’ve had. Does it sound — and my reading between the lines that maybe we could see you’re a bit less cautious today and we could see growth reaccelerate in the back half of the year?

Li Yu: I don’t want to be really associate growth being less cautious. Okay? I think to put it right situation is that it finally seems to be that we can take on the opportunity that will be presented to us and we have to be ready. As you know, your app personnel that their production will come maybe three to six months later. So that’s not immediate effect on that. And the general feeling is that, as I said, to me, I personally believe the big picture is that rate is finally coming down and sooner or later it will stabilize into a new norm situation, which will be reasonably lower than it is today. And although every pricing activity is adjusted to the new loan, new rate, and every pricing is new inflation number, product number, things will start to sort of like normalize themselves.

And with our current strengths of economy, I personally believe that business opportunity has increased and there will be less risk of doing transaction today as compared to one year ago.

David Feaster: That makes sense. Makes a lot of sense. Thank you for that color. And then last one for me, maybe just following up on the branch expansion LPO. I love seeing the continued expansion in investment. I’m curious. How do you think about De novo expansion priorities at this point? What other markets are interesting to you? And just kind of curious how you think about it as you continue to expand. Where are you focused?

Li Yu: David, our expansion really has two different directions. One is that areas we think we have a lot of business we want to be. And another situation is that when we have to personnel. And Preferred Bank is the small institutions, so we can go anywhere and get a reasonable amount of business with a new operation. And therefore, if we are finding the banker has the book of business, we tend to build a team around him and set it down with the operation there. Having said that, and Silicon Valley is one of the areas that we have wanted to be there. And then we have never been able to get the right person there in the last 10 years so on. Finally, situation comes. Wellington is able to locate a couple of people he thinks it will be fitting to our needs and so on. So we are starting that particular operating. It’s the right place for us and probably the people is the right people.

David Feaster: Okay. That’s helpful. And maybe I just want to squeeze one more. You’ve been real active in repurchasing stock. Curious, maybe with potential for gaining growth to accelerate the move in the stock that we’ve seen. Curious your capital priorities and your appetite for additional buybacks?

Li Yu: We have always been letting our shareholders know that growth in the normal situation is our preference as it represents the best long-term value. But within the last three, four years, starting from the pandemic with the inflation and so on, where the bank is making over 20% return with the cost of alternative costs in the 5% range, it does not seem a good idea that had the idle cash, which we’re not doing much, nobody is doing much along those. With idle cash being staying there making 5%, buyback on stock represents a pre-tax 33% return, so economics tells me that our shareholders would like to trade it over the long term if we do that.

David Feaster: Makes a lot of sense. All right, thanks everybody.

Operator: This concludes our question and answer session. I would like to turn the conference back over to Li Yu for any closing remarks.

Li Yu: Thank you very much. As I said that we’re very happy with the quarter and hopefully that, I personally believe that finally things started to getting stabilized and going forward. I hope it can only be better for the banking industry. Thank you.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.