Preferred Bank (NASDAQ:PFBC) Q2 2024 Earnings Call Transcript

Preferred Bank (NASDAQ:PFBC) Q2 2024 Earnings Call Transcript July 26, 2024

Operator: Good afternoon, and welcome to the Preferred Bank Second Quarter 2024 Earnings Conference Call. [Operator Instructions] Please also note today’s event is being recorded. This time, I’d like to turn the floor over to Jeff Haas of Financial Profiles. Please go ahead.

Jeff Haas: Thank you, Jamie. Hello, everyone, and thank you for joining us to discuss Preferred Bank’s financial results for the second quarter ended June 30, 2024. With me today from 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 that 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.

Li Yu: Thank you very much. First of all, I’d like to 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 Preferred Bank second quarter net income was $33.6 million, or $2.48 a share. This quarter, we have an annualized 8% loan growth and an annualized 5% deposit growth. For the quarter, we have $9 million charge-off. The charge-offs are related to the loan that was previously fully reserved as of the previous quarter. And we had an increase in non-performing loans of $22 million. I have included some details in our press release for your information and for your review. We believe these MPAs are either fully reserved or are adequately protected by the collateral and the resolution of these non-performing loans will not likely cause any significant impact to our future earnings.

It’s worthwhile to point out the root of the loan losses came from the pool of criticized loans. This actually has reduced $13 million from the previous quarter and the migration pattern also seems to be improving. We have always been fairly consistent with the operating non-interest expense and non-interest income. Going forward, I am not seeing any significant changes to these factors and we have been working to reduce the asset sensitivity of our balance sheet. We believe we’re not far away from what we see as the optimal level for us. And the much anticipated and hoped for interest rate relief will not likely causing significant effect to our future income statements. A year ago, the bank announced a buyback program of $150 million for the past 12 months, we have repurchased $72.5 million of our own common stock.

The regulatory approval for the program has expired. We are now seeking for reapproval or extension for us to be able to repurchase the remaining $77.5 million. I’m pleased to report with the $72.5 million repurchase, with the $2.80 a share dividend, and with a reasonable growth in loan and deposits. The banks TCE ratio actually improved by 53 basis points just as we have planned. We attribute this to the bank’s earning capability. Thank you very much. I’m ready for your questions.

Operator: [Operator Instructions] Our first question today comes from Matthew Clark from Piper Sandler. Please go ahead with your question.

Q&A Session

Matthew Clark: Hi, thanks. Good morning, everyone. Just one on the margin. We’ve got the adjustment for the interest income reversal. But do you have the spot rate on deposits at the end of June and the average NIM in the month of June, excluding that reversal?

Edward Czajka: Yes, total — so, the margin for June 3.89%, Matthew, and total cost of deposits is 4.08% has been consistent for a few months now. So, I think we’ve hit the apex there.

Matthew Clark: Okay. So the 4.08% for the month of June in total and the 3.89% includes that 11 basis point reversal?

Edward Czajka: No, does not. That did not happen in June. That happened in May.

Matthew Clark: Okay, thank you. And then your commentary about being — I’m sorry reducing your asset sensitivity. Can you be a little more specific at this stage? How much of your portfolio has floors? Where are they and how would you view yourselves with each 25 basis point rate cut?

Wellington Chen: We have a detailed floor analysis, later on we can provide you with. But in general, I’d like to say that during the past 12 months, or maybe as much as 18 months, we have reduced our floating rate loans. Actually the fixed rate loans, we have increased from 11% to right now approximately 25%. So, the floating rate assets or floating rate loans has reduced likewise by about 14%. So, this is actually what we have done. And we look comparing to our balance sheets, sensitivity of our liabilities, okay, you can see that we’re in general pretty balanced position.

Matthew Clark: Okay, great. And then on expenses, maybe for you, Ed, it looked like there was a comp accrual reversal here in 2Q. Just can you quantify that and then give us a sense for the run rate going forward here in the second half?

Edward Czajka: Well, in terms of non-interest expense, we came in a little light than I think, what I had previously guided to. We had a decrease on the salary and benefits side, primarily due to payroll taxes on the bonus, incentive compensation, which is paid out every Q1. So, going forward, looking at it, I would still keep the same guidance between $20 million and $20.5 million, Matthew.

Matthew Clark: Okay, thank you. Okay, I’ll leave it there. Let others ask questions. Thanks.

Edward Czajka: Thank you.

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

Andrew Terrell: Hi, good morning and thanks, Matt, for letting me slide in here. Can you talk about the $18 million hotel loan you mentioned, 51% LTV? Can you just talk about when the last appraisal or valuation came in on this property?

Edward Czajka: I think the valuation is a little bit over a year ago when the rate — when the hotel property is still undervalued, the value has actually improved. The reason that I want to say to you is that we are the unfortunate party that caught in the partnership fight. There’s a money partner own 99% and the work partner owns 1% and two of them, obviously many dear together, they’re starting to fight with each other. And the money partner really want to buy the 1% off. And obviously, that deal has not made. So both sides are taking their position. The non-accrual is positioned up, money partner takes, and therefore, we’re fully expecting to redeem the property at the foreclosure date.

Andrew Terrell: Okay, understood. And then if I could just ask on the kind of asset sensitivity position, here you are on the kind of 75% floating. And that mix has obviously come down. So helps for future rate cuts. But the cash position, any interest in taking some of that and fixing it in the bond book? Just looking at the forward curve with several rate cuts in there right now?

Edward Czajka: I wouldn’t — I don’t expect we would do anything dramatic, Andrew. There may be a point where we want to put some money to say — to work here, but I wouldn’t expect a massive investment in anything. We do like keeping both sides of the balance sheet relatively short, so.

Andrew Terrell: Yes, makes sense. Any thoughts on kind of incremental? I mean, your loan growth was pretty solid in the quarter. What are you seeing from a borrower demand standpoint and how should we think about loan growth in the back half of the year?

Li Yu: Andrew, can I take a little bit more time to answer that question for you? First of all, in the first quarter, okay, when the country is full believe the six cuts, okay, we see the loan demand actually goes up. Many people want to commit to new investments and these loans come to fruition in the second quarter. Usually, it takes a lag time about three months to get loan deals — loan done. And in the second quarter, when the country believes there are no pay — no rate cuts, we would be one rate cut, the demand is reduced. Okay. So, we are hope — we are seeing that possibly at the end of third quarter the loan growth will be limited. Okay? And although we are working — we’re cranking our engines up, try to work hard to try to get more loans, but the demand is not as high as the first quarter. As we are now anticipating rate cuts again, we think that the end of fourth quarter likely that will be more increased loan production.

Andrew Terrell: 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 into 2025?

Li Yu: Yes. We do see that. As rate cuts is happening, we like to think we can get in closer to our historical growth rate.

Andrew Terrell: Very good. Okay. Thank you for taking the questions. I’ll step back.

Li Yu: Thank you.

Operator: Our next question comes from Gary Tenner from D.A. Davidson. Please go ahead with your question.

Gary Tenner: Hi, good morning. Ed, hoping you could provide some of that data on the loan floors, say, after 50 basis points or 100 basis points of rate cuts.

Edward Czajka: Sure. So right now, Gary, 21% of the floating rate loans — first off, 98% of the floaters have floors. So, put that out there. And then of that, 21% of that is within 100 basis points. 79% is outside of 100 basis points of cuts. But that is moving, as you can imagine in that. The 21% number continues to grow each month as loans are renewed.

Gary Tenner: Got it. Thank you. And then I guess the natural other 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.

Edward Czajka: Yes. Q3, we have about a little under $1.2 billion maturing. And Q4, we have just — almost exactly $1 billion maturing. Those are at average rates right around 5% each. So, we would expect some relief in the coming quarters as rates have started to come down.

Gary Tenner: Great. Thank you.

Operator: Our next question comes from Eric Spector from Raymond James. Please go ahead with your question.

Eric Spector: Hi, this is Eric down in for David Feaster. Thanks for taking the questions. Just wanted to touch on the deposit side of the coin and get a sense of trends in the quarter, especially how NIB core deposits trended later in the quarter into 3Q. And your thoughts on core deposit growth, I think growth is going to come from existing clients, for success on new client account growth, any color there would be helpful.

Edward Czajka: I’m sorry, you’re going to have to repeat the question a little bit. It was hard to hear a little bit of that, please.

Eric Spector: Just wondering on the deposit side of the coin whether you get a sense of just trends in the quarter. What was the drivers of core deposit growth? Talk about how it’s shaping up early in 3Q and if you expect growth from existing clients versus whether you’re having success attracting new client account growth.

Edward Czajka: Right. All right, 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 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 think majority of our growth going forward will be from new clients as opposed to existing clients increasing their balances.

Eric Spector: Got it. That’s helpful. And then interest-bearing demand balances seem to increase pretty meaningfully. Can you just talked about whether that growth was from existing clients or is that migration? I’m just curious what rates are there?

Edward Czajka: 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.

Eric Spector: Is this better now?

Edward Czajka: Yes.

Eric Spector: Right. Interest bearing demand deposits seem to increase pretty meaningfully during the quarter. Just curious if that growth is from existing clients or new account growth, or whether that was migration. I’m just kind of curious what rates are there relative to the portfolio.

Edward Czajka: That’s a combination of both. We do see, obviously, people moving from noninterest-bearing to interest-bearing due to the rate environment, although that — as I said, that migration pattern seems to have slowed down significantly.

Eric Spector: Got it. And then lastly, just on capital priorities, and then I’ll step back. You’ve been an active repurchasing stock. You increased the dividend this past year. 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 would be helpful.

Edward Czajka: Well, as always has been the case for us, our primary focus first on capital allocation is organic growth. Second, dividends third buyback and fourth would be anything 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 – 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 you there. Are you there.

Eric Spector: That’s helpful. Thanks for answering my questions. I’ll step back.

Operator: [Operator Instructions] Our next question is a follow-up question from Matthew Clark at Piper Sandler. Please go ahead with your follow-up.

Matthew Clark: Just wanted to ask about the net charge-offs and 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?

Li Yu: Well, the charge-offs, roughly $7.5 million of the $9 million related to these – to the one C&I loans, okay. And – so basically, that’s a charge-off for me. Well, I guess – related to a previously resolved real estate loans.

Matthew Clark: Okay. But the types of – the business, I guess, that these – the two businesses that these are related to? I’m just trying to get a sense for what types of numbers these are.

Li Yu: It’s not related two. It’s a vast fast different these two business.

Matthew Clark: Okay. Sounds good. And then just back on the question about the CD repricing and kind of what’s coming up for renewal? Are the renewal rates 5%? Or that’s what they’re maturing at. I’m trying to get a sense for kind of the differential?

Edward Czajka: Yes. No, they’re maturing at 5%. 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.

Matthew Clark: And your – what’s your current offering rate? Where are they starting to renew this month?

Edward Czajka: Depends on the term. It goes anywhere from the 3s up to five, but that’s a longer term, and that’s definitely not picked by our clients. .

Matthew Clark: Okay. Sounds good. Thank you.

Operator: And our next question is also a follow-up from Andrew Terrell from Stephens. Please go ahead with your follow-up.

Andrew Terrell: Hi. Thank you. If I could just follow up again on the C&I charge-offs and take another stab. Just can you talk to what specifically drove, I guess, the deteriorating fundamentals of the companies for the lows that you charged off? Just trying to get a better sense of kind of what happened there.

Li Yu: Well, Nick, do you want to take that question?

Nick Pi: Yes. This credit actually, we’re – there will be – there should be some recovery later on because we are waiting for some of the litigation process because one of the loan, we have arbitration pretty soon in either third quarter or early part of the fourth quarter. So the loan fully guaranteed by individual grantor with a very strong financial conditions. So that’s one of them. And the other one also, we’re doing – we do have the judgment on this credit. And we are doing post-judgment examination at this time. So hopefully, for both of them, we can get some recovery from the quarters coming.

Li Yu: As you can see, we charge off every – I mean, we have fully reserved everything hopefully that the legal proceeding has produced some results for us.

Andrew Terrell: Okay. Thanks for the question.

Operator: And ladies and gentlemen, at this time and showing no additional questions, I’d like to turn the floor back over to management for any closing remarks.

Li Yu: Thank you very much. I think that I must speak for many, many, many of our customers – our industries customers that we hope that the finally, there will be – there will be a rate cut soon. And personally, I do feel that the said has not been proactive in the rate increases. And at least you should learn their lesson to be a little bit proactive on their rate reductions, okay? And I mean – so – it is only a hope, maybe it’s a prayer. And I think many of our borrowers deserve to have low interest rate down. Thank you very much.

Operator: 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.