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spk03: Good day, and welcome to the Preferred Bank Third Quarter 2021 Earnings 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. Please note this event is being recorded. I would now like to turn the conference over to Jeff Haas of Financial Profiles. Please go ahead.
spk00: Thanks, Jason. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the third quarter ended September 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. Liu. Please go ahead.
spk08: Thank you very much. Good morning, ladies and gentlemen. I am very pleased to report our third quarter net income of $26 million, or $1.77 a share. Those are new records for our preferred bank. Likewise, the return on average assets of 1.8% and return on equity of 18 percent are also the recent year's highs. This quarter, we have experienced significant deposit increases. Quarterly deposits increased nearly $400 million on the annualized basis, a little bit over 33 percent. Important thing is that the quality of the deposit gross is good. 70% of the deposit gross are in the area named interest bearing demand deposits. Another 20% is in the area of interest bearing demand deposit and money market. Deposits cost improved moderately from the previous quarter. And I do expect that the trend will continue that moderately improved in the fourth quarter. Loan for the quarter increased $77 million or 7.1 percent annualized. This is lower than our previous quarters. And we look into our pipelines. We found that This quarter, we originated $260 million on new loans. However, the $260 million on new loan is in line with previous quarters, slightly better. However, the payoff for the quarter increased to $210 million, which is roughly about compared to average $150 million in the previous quarters. Long-year moderated a little bit, okay, and likely to continue to moderate, I mean, compression, moderately compressed in the coming quarter. The net interest margin come in 3.6 percent, which is lower than previous quarter. but that was the result of oversized deposit growth. This quarter's bright light is in the non-interest income. We have $1.1 million increase for the quarter, largely due to the increased LC fees. Looking ahead, LC fee likely to be satisfactory in the fourth quarter, but probably will be slightly less than the third quarter. Our operating expense, to my personal surprise, coming at 30.4 percent. We started to fear the inflation and wage increase pressure. And I guess the full effect of inflation will gradually show up in the later quarters. Our credit quality is stable. There are no deferred payment loans under the CALS Act at this time. PPP loans have been reduced to $65 million. And the non-performing loans were steady. Altogether, we had only seven non-performing loans, including two of them on the mortgage product. We are highly encouraged by the third quarter operating results. Under the intensive long competition environment, which we now get used to, and also under the slow progress in controlling the Delta virus, and under the inflationary, although it's called transitional, but we don't know how long this transition is going to be here. But I do see all these facts will gradually improve in the coming days. And we here in the Preferred Bank are quite optimistic about our 2022 year. Thank you very much. I'm ready for your questions.
spk03: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. 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'll pause momentarily to assemble our roster. Our first question comes from Matthew Clark from Piper Sandler. Please go ahead.
spk01: Matthew Clark Good morning. Good morning. Maybe just on the loan growth outlook and the pipeline, sounds like the production is still very strong. The payoffs are obviously a little disappointing in some respects. What are your thoughts on payoffs going forward, and how would you describe the pipeline? I think last quarter you mentioned it was satisfactory, but any other kind of additional color as to what you might mean by that would be helpful.
spk08: At this point in time, it's early October, I think our pipeline is probably equally, if not slightly better than the third quarter, which, as I indicated, third quarter actual pipeline was better than previous quarters. But there are elevated payoff activities. And this low interest rate environment is very prolonged, and many people are doing loans at the yield rate less than our net interest margin, but fixed for ten, five, or ten years, which we think will be detrimental to the future, okay, given the fact the Fed is about to taper and maybe to lift off somewhere sometime close from a closer site. Maybe the situation we choose not to compete because of these reasons. So we just want to maintain going forward that our portfolio is not short-sighted.
spk01: Okay. So, you know, maybe that elevated payoff activity continues. Maybe you do a little bit better in production. So maybe the growth rate is somewhere in between this quarter and your prior expectations of kind of low to low double digits, or teens, mid-teens?
spk08: As you probably can guess, it's very hard to predict at this point in time. But we certainly, I mean, our past experiences, we always have growth. We certainly will try to reach the level of previous quarters. We'll try very hard. We'll continue hiring people. I mean, adding staffs, we will continue to move forward looking for new loan opportunities, but somehow the market has to cooperate, too. You know, the activity of, I mean, the slowness of the delta control certainly will be affecting the transaction level.
spk01: Okay, great.
spk08: This is a priority, getting loan growth.
spk01: Yep, okay, great. And then just the other one for me was on the letters of credit fees and the sustainability of that activity. Is that something you think you can replicate going forward? Do you feel like it was a little outsized?
spk08: I think third quarter is a little outsized, but the first quarter will be better than the second quarter, but probably lower than the third quarter a little bit.
spk03: The next question comes from Gary Tenner from DA Davidson. Please go ahead.
spk05: Thanks, Leo. Quick follow-up on the letter of credit fee question. Lee, based on kind of your comments, does the fourth quarter represent sort of a baseline that you might think about on letter of credit fees going kind of a seasonal impact that would diminish going to the first quarter of 22?
spk08: The nature of letter of credit is when you open it, you earn a fee. So actually, it is a certain degree of volatility. But looking at the situation to the best we can tell, third quarter will be slightly less. Fourth quarter will be slightly less than third quarter. And I hope in the first quarter, so far it looks like we'll be closer performance quarter at this time. But obviously, we hope to pick a few more deals and record more free income.
spk05: Okay. And last quarter, I think, Ed, you kind of highlighted payoffs as one of the risks of being an offset to the production as more of a transactionally oriented bank. And I think this quarter, obviously, we saw that. Is there any room production side? I think you talked about some new hires a few quarters ago. You know, just thoughts on the ability to kind of try to outrun some of the payoffs.
spk08: Let me put it this way. You know, it's like talking to our shareholders. We would do our best, okay? And the only thing I can say is that looking at our past experiences, we always were trying to put production as one of our top priorities. But anything at this point in time, you know, the crystal ball is kind of murky at this point in time. Payoff doesn't come in with a lot of, I mean, notice ahead. It just happens. I mean, suddenly you receive a demand. It is a payoff, okay? So sometimes it's quite surprising to us that the payoffs happen. We do our best in the weekly basis, try to update our list of payoffs. And we do our weekly basis, try to update our pipeline. And that is a bank top event every week.
spk05: Okay. And then finally for me, it looks like you put a couple hundred million dollars to work in the securities portfolio during the quarter, but with the deposit flows you mentioned, you know, the cash balance is increased by a similar amount. So, you know, just that's about maybe thinking about putting more of that to work at, you know, some shorter term yields that might be not as attractive as loan yields, but won't, you know, lock in the rate for that period of time we're talking about that other banks are doing.
spk02: Yeah, it's a difficult challenge, Gary, as you can imagine, in this rate environment to try to go after yields. So we're not going to necessarily do that. But yeah, we put about $200 million to work, and it's very short, monthly Gini floaters. So we're not taking interest rate risk there. We may do a little bit more of that, but at this point, we don't want to go long in the bond portfolios. We'd like to lend it out as our first option. And to add on to your previous question regarding hires and production, I think you have already seen within the third quarter production numbers some of the effect of the new hires that we have taken on this year. So we certainly look forward to, you know, increasing that as we go forward. But as Mr. Hughes said, it's, you know, it's top priority. We're doing our best.
spk05: Sorry, Ed, if I cut you off earlier.
spk03: Thanks for taking my questions. No worries. The next question comes from Steve Moss from B. Reilly. Please go ahead.
spk06: Good morning. Morning. Maybe just on loan pricing here, kind of curious as to what our new money yields are these days and also, you know, loan yields ticked up quarter over quarter. I know there's a little bit of an uptick in fees, but that doesn't seem to account for the increase in yield quarter over quarter.
spk08: You had the number right in front of you.
spk02: Yeah, so if you recall, Steve, last quarter we had an interest adjustment downward about almost $2.3 million. I remember that now. Yeah, that was the driver. But overall, loan yields are excluding that. Just looking at that a few minutes ago, overall loan yields are holding up fairly well. The challenge with the margin is the rest of the earning assets and the cash that we have.
spk06: Right, okay. And then in terms of the yield on the Ginnie Maze you guys put on, I'm just kind of curious, what's the rate there?
spk02: You're going to ask that question in public. 45 basis points. Okay.
spk06: And, you know, what's the appetite? I mean, you're sitting on, call it over a billion in cash in terms of, you know, adding more in the upcoming quarter. How are you thinking about that in the short term?
spk08: We would obviously try to deploy that, but we have to weigh in on the interest rate and the trends going forward on the whole situation. And also we as the operator must be cognizant about once the tapering happens and once the sort of like, I wouldn't say tightening or normalization is happening, would the high liquidity that every bank is having will be holding on or some of them will be going away. So we just have to be careful about these items. Some of the items is precautionary. And so, I mean, some of the situation we're doing is really, really preventive medicine. So it's not going to be, we're not going to be chasing the last dollars in risk of this kind of nature.
spk06: Okay. That's fair. obviously consistently you guys have done in the past. And I guess maybe just in terms of expenses here, I'm sure you talked a little bit about inflationary pressure. Just kind of curious as to how you guys are thinking about expenses for the fourth quarter and maybe a little bit into 2022. Well, my guess is they're going to be higher, but edge has a different flavor.
spk02: No, I agree with you this time, sir. They will likely be higher. The sub-15.4 this quarter I think was pretty good, given the environment that we're in. But clearly, as we go forward, wage pressure will continue to weigh on expenses. So they will likely increase incrementally going forward.
spk08: Steve, wage pressure is that when you people start to take your people away with an offer, and then the new hires coming in at the level higher, we are forced to, somewhere along the line, making adjustments for all the staff. So these things, as we go forward, we'll make rational adjustments. It only reflects on the expense level all the time going forward. And I think every bank would face that kind of pressure.
spk06: Okay. All right. Well, thank you very much for all that.
spk03: Again, if you have a question, please press star, then 1. The next question is from Andrew Terrell from Stevens. Please go ahead.
spk07: Hey, good morning. Good morning. Yeah, I was hoping maybe we could get an update on how business is trending over in Texas with your Houston office. Are things still on track to kind of hit the, I think it was $150 million of outstandings by the middle of next year? And then outside of that, any thoughts on maybe kind of new market expansion opportunities at this point?
spk08: Well, unless you want to add, I answer that first, okay?
spk04: Please.
spk08: Okay? We have some turnover in Houston. The leader of the team, which is not a producer, more or less a visionary person, has chosen to take another position with another bank. Following him is one or two other producers. Right now we have three loan staff at this point in time in Houston. They continue producing. The total level of expectation in the next six months is moderated down, but still will be very much in line with the expenses, the payroll related to that. We are currently hiring and looking for new staff to beef up the Houston operation. So when the new staff coming along, it will be re-accelerated. So, anything to add?
spk04: No, I think you covered basically, and just to mention that the loan pipeline from Houston still looks pretty robust. Still have a pretty good inventory going. And, you know, people over there are holding the port and holding the production.
spk07: Okay, thanks. And any thoughts on kind of potential kind of new market expansion?
spk08: We are working on it, but we cannot say anything until we're successful lending some team of people.
spk07: Okay. I think the valuation of shares has kind of improved a bit relative to where you were repurchasing at during the third quarter. Any kind of change in appetite for buybacks moving forward or should we still expect share repurchases?
spk08: Well, Ed, do you want to report on that?
spk02: Sure. Andrew, we have in place with the repurchase plan is a hard cap, a hard ceiling of $65 a share. And so we ran into that around mid-late September. And so we not terminated, but we have not been active in the market since that time.
spk08: Obviously, if our share continues to improve, Gates, we will go to the board and seeking for their approval to increase the limit on the whole situation. But given that the ability to generate earnings and beef up our capital level and additional, the fund should be replenished the capital account easily.
spk07: Understood. Okay. Thank you. Mr. Yu, how are you feeling about the reserve at around 1.4% today? Do you think there's kind of further room to work this down? Are you comfortable with where it's at today?
spk08: I can only answer this thing, and then I have Nick answer that a little later. First of all is that if you remember the pre-pandemic level, okay, the CISO, day after CISO conversion, our level is at 150%. So last year, I think the banking industry has been very prudent in putting a whole lot of reserve on a situation. So many of the factors that depend on each bank's viewpoint is different, but everybody started to recognize improved economic conditions. So everybody's model and CISO model depends on economic conditions. So when it will return back to the pre-CISO level, I mean, day after CISO level, we do not know. But I think if the credit quality holds steady, if the economy does not deteriorate, one day we get to that level.
spk09: Nick, anything to add? I totally echo Mr. Yu's comment. With the improvement of economic conditions, related to our CISO forecast, as well as on the qualitative side, we tentatively believe that there will be somewhat less stress on the reserve requirement in the future quarters. However, definitely, as Mr. Yu mentioned, it will definitely also depending on lots of moving factors such as loan growths, migration of credit quality, and also GDPR employment rate, all those, et cetera, et cetera. The certainty of pandemic. Right. So, definitely, based on our best estimate, for the long run, our reserve should be gradually reduced to around, you know, 1.3% level plus minus, depends on all those moving factors. So, we're hard to see how we're going to handle this, you know, during the next few quarters. It's eventually... We'll be at that range.
spk07: Understood. Okay. Thank you for taking my questions.
spk03: There are no more questions in the queue. This concludes our question and answer session. I'd like to turn the conference back over to Lee Yu for any closing remarks.
spk08: Well, thank you very much for interest in our bank, and we appreciate your support. And, you know, we are not looking for a home running every segment of our operations, but we do look for overall, I mean, above average or put us in the high performing category. So we'll continue. our effort toward the direction. Thank you.
spk03: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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