This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk08: Good afternoon and welcome to the Preferred Bank second quarter 2021 earnings conference call. All participants will be in a 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. Please note, this event is being recorded. I would now like to turn the conference over to Jeff Hawes of Financial Profiles. Please go ahead.
spk00: Thanks, Chad. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the second quarter ended June 30th, 2021. With me today from management are Chairman and CEO Lee Yu, President and Chief Operating Officer Wellington Chen, Chief Financial Officer Edward Chayka, Chief Credit Officer Nick Pye, and Deputy Chief Operating Officer Johnny Hsu. 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 banks. 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 over to Mr. Lee Yu. Please go ahead.
spk04: Thank you very much. Good morning, ladies and gentlemen. Preferred Bank second quarter net income was $21.2 million, or $1.44 a share. This quarter we have some non-recurring items. First of all is correcting an interest income item which related mostly to 2020 events. And the second one is an amortized discount on a term loan, on the subject loan that was previously existing, which we called. And third one is a loss on a sale of a loan. Without these three items on a normalized basis, our net income would be $1.58 or $1.59 a share. And our return on equity will be over 17%. On the same basis, net interest margin for the quarter was 3.47%. A 14 basis points drop from the previous quarter. Under the low interest rate environment, we continue witnessing that new loans being made at less of a rate than the old loans paid off. And we also have many customer renegotiations on rates. For instance, seems to be a whole lot of SNCC loan rates has been renegotiated them. Also, the large access to liquidity also weighing on the net interest margin. Our loan, however, has grown 11% for the quarter. During the quarter, we are seeing a vibrant loan pipeline, but we also see increased payoff activities. Looking ahead, we believe the pipeline will continue to be reasonably satisfactory. This is especially true when many of our newly hired loan officers will be closing loans in the ensuing quarters. We also see a modest interest cost savings in the quarters, two quarters ahead. Our credit matrix has improved. Classified assets is down. Criticized assets is down. Deferment of loan as of June 30th is only $1.5 million. And for all the interest and principal that we have granted deferment to our borrowers, we have collected back 67% already. This quarter we have a little bit of charge-offs. but that was charging of the previously reserved loans. So when there's a charge-off, there's a corresponding reduction in reserves. This quarter, we're recording zero loan loss provision. I must report to you at this time that a conversation I've had with one of our private shareholders yesterday, Specifically, he is questioning me as to why we are not having a long-lost reserve release during the quarter, like most, almost every other banks. I told him, first of all, of course, the CISO's mathematics. But I also told him, from a personal point of view, and looking at the glass half full basis that I'm kind of pleased that we didn't have any release this quarter. The most recent economic forecast that was reported by Wall Street Journal yesterday was a forecast by Morgan Stanley's chief economist who indicated the economic expansion will continue at a reasonably good rate going well into 2022. We echo her sentiment. You see, there's not a whole lot we can do about the current low-interest rate environment. And there's not a whole lot we can do about the inflation pressure, but we here will be dedicated to continue to provide top tier profitability to our shareholders. Thank you very much. I'm ready for your questions.
spk08: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. And the first question will be from Matthew Clark with Piper Jaffray. Please go ahead.
spk06: Hey, good morning. Hi, how are you? Good, thanks. First one, just on the loan yields and trying to get a sense for what kind of rates you're getting on new business. I think last quarter you mentioned that new business is coming on about 90 basis points below the portfolio yield. I think your core loan yield this quarter was about 499 if we exclude the PPP and the interest income reversal. What is the weighted average rate on new production this quarter?
spk04: On the new production this quarter, it is really sort of like an abnormal quarter. New production yield rate comes in 4.05%, where the payoff rate comes about 60 basis points higher than that. That is because we have some rather large SNCC loans being repriced 50 to 75 basis points lower. So it's kind of changed the mixture of the thing. Our own portfolio type loan, we are doing basically right around about 4.3, 4.4 level.
spk06: Okay, great. And then just on the growth in commercial real estate this quarter, that was most of your incremental growth. Can you give us a sense for the underlying property types that's driving that growth and your thoughts on your ability to maintain low double-digit loan growth into next year, given your pipeline?
spk04: I want to volunteer. You want to volunteer? Sure.
spk09: Matthew, this is Wellington. Most of that, what we put out is multifamily, residential. We have single, mixed-use warehouse type of properties. A lot of warehouses. Okay.
spk06: Understood. Great. And then last one, maybe for Ed, on the expense run rate going forward and, you know, given the build out of the LPO in Texas, can you give us your thoughts on the run rate going forward, whether or not that you might kind of remain at this level or might we see a little bit of growth?
spk01: Well, I would venture to say, I mean, we did, I think, a really good job holding it under $15 million this quarter. And as you recall, I probably guided a little higher than that in the previous call. And so I'm going to be consistent with that, Matthew, and say it's going to definitely go up north from here. I would say in the low to mid-15s, somewhere in that neighborhood, simply because We have a number of things that are going on, but one of which is, you know, hiring that we've been doing. As we mentioned in the previous call, this has been, so far, and Wellington should probably talk about that as well, it's been a pretty good year for recruiting this year. So, to the extent that happens, salary expense will increase, but we'll see better top-line growth as well.
spk06: Male Speaker 1 Okay. Thank you.
spk08: Male Speaker 2 Thank you. And the next question will come from Andrew Terrell with Stevens. Please go ahead.
spk12: Hey, good morning. Hi, Andrew. Hey, I just wanted to ask, how much of the total portfolio today is considered syndicated or SNICs? And then any kind of specific industry concentration within that?
spk01: It's about, I think it's right around 11% of the book, Matthew. There are no industry-specific concentrations. These are typically credit-type, you know, facilities for these larger organizations. We do have, as we've talked about in the past, we have about, I believe, 50 or 60 million in the entertainment industry, but those are not production credits. Those are primarily library-based credits.
spk12: Perfect. Thank you. And I did want to switch back over to kind of the new hire front just briefly. Are there any specific geographies you're more focused on in hiring, or is it really coming in across the board? And any kind of incremental color on kind of the type of institution you're hiring away from? Is it larger, smaller, similar size? Any color on the hires?
spk04: Andrew, we have previously talked about it. Our hiring is basically opportunistic. So we have, whenever the several regions we have, whenever we found a qualified personnel that we try to get them paid, and if we're lucky enough, we then come into terms for them to join us. And it is not specifically we have targeted any region at all, but rather than all the regions we have, we're continuously cultivating people coming to us. mostly our talents coming from bank about the within the range of our size. In other words, a little bit smaller than we are, a little bigger than we are.
spk12: Perfect. Thank you. And then just last one for me. It looks like the end of period PPP loans were essentially flat to the prior quarter. Just any kind of updated thoughts or expectations on a timeline for forgiveness for the remainder of these loans?
spk05: Andrew, this is Johnny. On the PPP loans, we're going through the forgiveness process right now. And we haven't started on the second one yet, second batch, because that guideline hasn't come out yet. But we still have around 50 million that we're expecting to be forgiven from the first batch.
spk12: Okay, perfect. Thanks for taking my questions.
spk08: Sure. The next question will be from Steve Moss with B Reilly Securities. Please go ahead.
spk03: Good morning. All right, good morning. Starting off with maybe just the appetite to deploy excess liquidity here. Just kind of curious from the release there, you know, how much, what are you thinking in terms of securities purchases, if any, and just, you know, what you may be expecting there?
spk04: In general, we just have too much liquidity. We have roughly 22% of total assets invested in cash today. on different types, obviously, that's earning less than 10 basis points. So know that our effort is to invest them. And obviously, first choice is the loan. But we are looking at the security side, and we actually did some in the late second quarter and started to do it. But as you know, the choice has not been made. whole lot of them if you consider risk. So, Ed, you want to echo him and put more on that?
spk01: Yeah. No, Steve, as you know, it's a tough time in this great environment. You know, spreads tighten in, so you really don't get paid for going along at all. So what we've been doing is we've been kind of mixing up between cash alternatives, very, very short monthly adjusters, agency-type stuff, and we've put quite a bit into that, over $100 million into that, and then we've been picking off here and there munis and corporates as we find value here and there. But it's a long slog, but the mortgage product yields almost five times what the overnight IOER rate is, so that certainly helps. But these are base hits. These aren't home runs, as you know.
spk03: Okay. Right. Now, that makes sense. And then just on the other side of the balance sheet, you know, deposit growth remains strong. Just kind of curious as to where you guys are pricing CDs these days and just that deposit environment.
spk01: Well, I can talk about the pricing. I think Wellington can probably talk about the market maybe better. We're trying to keep our pricing as low as possible without impacting growth going forward. But as you know, there's a lot of money in the system right now. The Fed has put a lot of money into the system. And so we do want to grow deposits because we'll eventually deploy them, but we've got to do it in a real cost-effective manner. We've been working very hard to try to bring those costs down.
spk09: Yes, Steve. This is Wellington. We are very selective on our deposit gathering. Between our deposit officer who are focusing on individual deposit and our commercial lending officer focusing on business DDA deposit, we just try to be very selective and continue to keep our pricing down or the cost down and all that. But having to say that we're always out there looking for good opportunity is a to a bill or a core deposit?
spk04: Steve, this is Lee. One of the things that I hold a slightly different view than Dave do now, you know, I'm an online person. I always believe franchise value is in the deposits you build. And you build deposits first, even though it's short-term disadvantage that you have to bite the bullets in order to have the muscle there to help to the long-term growth. So this institution will continue to cultivate deposits now just because it's not profitable right now, but rather for the long-term stability, the growth, the value of our franchise. Yeah.
spk03: Right. No, absolutely. And in terms of maybe just tying out your loan expectations here, Lee, you spoke that pipeline and production should be satisfactory here. Do you think, you know, back end load of this quarter, do you think you hold the pace on moon growth? Maybe we could see a little bit of a step up in the second half of this year?
spk04: We have previously been telling everybody, okay, we think this second half of the year will be a little bit more than the first half of the year. But, you know, this business is, you know, after many, many years, it's really, you know, kind of hard to predict, especially in the early part of the quarter. Much of the situation will materialize in the mid-quarter and so on. But the early indication is that our momentum is there. And I would say, I would hope, that the new offices were the added muscle that we needed to bring to a higher level than the previous quarters. Of course, that we still have to probably be careful about the whole thing. I have a chief credit officer sitting right beside me whose sole job is to say, don't do crazy things.
spk03: All right. Well, thank you very much for all that, and next quarter.
spk08: And the next question is from Tim Coffey with Jannie. Please go ahead.
spk02: Thank you. Morning, everybody. I wonder if you can provide an update, if you had an update, on how the loan growth is going in the Texas operation.
spk04: Well, Texas operation in general has been progressing just along the same lines same line that we are previously forecasting. And I guess previously you have reported to them how much they were expecting to produce for the year?
spk09: I know we have expressed how much they were expecting, but last quarter they contributed about 10% of our loan growth.
spk04: Okay. In Texas, it's two sides. Volume-wise speaking is obviously very, very satisfactory, you know, and consider the process to go through. But, you know, we have to also, you know, start to be a little bit choosy about the type because of yield and these kind of things as we're going forward.
spk01: Okay.
spk02: Well, they don't have to battle. Yeah, I'm sorry.
spk01: They don't have to battle the payoffs, new portfolio.
spk02: Yeah. That's true. And, Ed, just kind of circle back on the liquidity question. Just, you know, philosophically, how long do you think, you know, you're going to be carrying that excess liquidity?
spk01: Wow. That's a great question. So, you know what I've always found? First thing, the one thing I've always found, Tim, is when liquidity is really strong is when rates are lowest. liquidity starts to dry up, rates go up, and you know that always happens. And so it's ebbed and flowed over the last 10 years. We've really held excess liquidity for the last 10 years since the financial crisis ended, quite honestly. And it's just built and built and built. And we've never came to a situation where we felt yields were going to finally go down, or I guess we could have done it in February, March of last year if we were really brilliant. But we've never felt comfortable to be in a situation where rates were going to fall pretty meaningfully and we could put some money to work pretty effectively and, you know, make use of that money. So we're just going to keep putting money to work as we can, slowly chip away, but we're not going to make huge, meaningful inroads. I mean, our liquidity went up $150 million on average just in a linked quarter, from quarter to quarter. So when you look at that, that's a real deleveraging impact on the margin. But we'll continue to chip away at the money as we can, but we're not going to do anything really substantial.
spk02: Great. Okay. No, that's great color, Ed. I appreciate it. Those were my questions. Thank you very much.
spk08: And again, if you have a question, please press star then one. The next question will be from Gary Tenner with DA Davidson. Please go ahead.
spk11: Thanks. Good morning. I had a question. I think most have been answered, but regarding the loss on sale loans this quarter, I think $261,000. It was closer to $400,000 last quarter. Just any color on that and any visibility as to additional sales as we go through the back half of the year?
spk04: No. I mean, actually, it's really a strategic move on our side, okay, because we had a couple of SNCC loans being downgraded. Okay, and heading into examination, we do not want to carry these things from a person. Okay, but it's more also that, you know, strategic situation rather than financial related. We, as you know, looking at our back history, we don't have, we seldom sell any loans, okay.
spk11: Okay, so just something that kind of very, specific to a couple of credits ahead of an exam.
spk04: There's two SNCC loans that are being downgraded.
spk11: All right, great. Thank you.
spk08: And the next question is from David Feaster with Raymond James. Please go ahead.
spk10: Good morning, everybody. Hi, David. I just wanted to get a sense of some of the puts and takes with loan growth just to get a better understanding of some of the underlying trends. I mean, payoffs and paydowns have been a significant headwind like we've talked about. Just curious if you could quantify like how payoffs and paydowns have trended and maybe the underlying strength of your originations. Just some detail there would be helpful.
spk04: Let me tell you what the origination effort is, okay? And I have the numbers right here. Okay. For the second quarter, we have originated a total of, okay, hey, just after I'm bragging, where's the number? Okay. We've originated $428 million of commitment with outstanding about $305 million. But the payoff is nearly $200 million. Okay. So... Obviously, these number changes from time to time. You see, we are not a product type of a bank. We are relationship type, a one-off type of bank. All the loans, all the deposits, really one-off type of thing. So sometimes it's just certain customer, I mean, sold their property or they went public, they don't need us anymore. All these kind of things happens.
spk10: Okay. That's helpful. And then, so in our recent meetings, we talked a lot about C&I growth being a major focus, and we did see some growth in the quarter. You guys have done a great job expanding C&I. Just curious, any updates on this segment, what you're hearing from your C&I clients, and just your strategy for continuing C&I growth going forward?
spk04: C&I growth is probably the hottest. It's coming in You have an officer who even work on the deal maybe as long as one to two years before they can get to the C&I to get customer transfer to us. Unlike a real estate transaction, there's a little bit more transaction basis plus the relationship. But C&I is purely relationship and has a lot to do with timing. And one of the situations is that what we are facing right now is I'm trying to decide on a temporary basis how should we control a C&I company. You see, CMI is now being priced to a level that is, how should I say, does not fit to our operating model that much. You see, you talk about the regular customer type of CMI, it's basically they price much below the real estate loans. And you talk about the SNCC, now it's, Not in the ones, in the low twos. That's a standard in the whole situation. Realize our net interest margin is right around 350. So, I mean, these things is just, if you do a few of them, or if you do a whole lot of them on the situation, your financial performance will be coming down. So we have to, from time to time, adjust our CNR appetite based on based on the relative yield and rates we can get. At this point in time is that I am not projecting to see a whole lot of gigantism in my loans because it's uneconomical at this point in time.
spk10: Okay. And then just any thoughts on the reserve? You touched on this in your prepared remarks, but just any, I guess, how do you think about provision expense going forward? Would you kind of expect to It sounds like you'd prefer to grow into the reserve. Any thoughts on kind of what to normalize?
spk04: Yeah, it is not up to us. It is up to the CISO mathematicians. You're well aware of, okay? But if I have to make a prediction, because there's a lot of unknown factors. For instance, the vibrant, I mean, the delta is coming stronger and stronger. So if that's happening very strong, that puts Preferbet in a better position. I mean, because we have more reserve compared to some of our peer groups. But if it does not go strong, then I would say there's more than 50% of the chance that we will have some reserve going forward, reserve release going forward, but still have to go through the calculation of all the economic factors, all the Q factor, all the internal downgrading, grading of the loans, and these all kind of complicated things. Got it.
spk09: Thank you.
spk08: Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Lee Yu for any closing remarks.
spk04: Thank you very much. You know, although we're a very noisy quarter, okay, but looking at the normalized basis, we really have a record earning quarter, okay? And we like to think that all the operating matrix is to you, We're still the bank that can produce or have been producing more than 10% loan growth and controlling our costs and have reasonable net interest margin compared to our peer group. And above all, we have probably a very favorably positioned profitability in ROE. Certainly, we'd like to continue to do that. We just hope that the economy will be going at the same condition as we're seeing right now, and I would hope the pandemic will be over soon, and I certainly will hope everybody will stay safe and stay healthy. Thank you very much.
spk08: And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now
Disclaimer