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spk03: Good afternoon, and welcome to the Preferred Bank 2022 first quarter 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. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note, this event is being recorded. I would now like to turn the conference over to Larry Clark of Financial Profiles, Inc. Please go ahead, Larry.
spk00: Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the first quarter of 2022. With me today for management are Chairman and CEO, Lee Yu, President and Chief Operating Officer, Wellington Chen, Chief Financial Officer, Ed 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 related 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. This time, I'd like to turn the call over to Mr. Lee Yu. Please go ahead.
spk10: Thank you. Good morning, ladies and gentlemen. I'm very pleased to report our first quarter net income of $26 million of $1.74 per year. fully diluted shares. This is a 23% increase from the same quarter of previous year. Loan growth was a highlight for this particular quarter. It increased 4% on a linked quarter basis and annualized at 16%. The fourth quarter loan origination momentum has carried over to the first quarter, but with payoff activity moderating a bit, which resulted this performance in the quarter. Looking ahead, we are very encouraged by the applications for new loans that has received so far. Although these applications will be subject to higher standards of underwriting, we do believe that second quarter results could be quite positive. The positive growth for the quarter was moderate at 1.6% lean quarter of 6.4% annualized. This is well within our expectations in light of Fed's activities. The higher loan production versus the lower deposit increases has allowed us to deploy some of our excess cash to better usage, which we think is proper financial statement engineering. Our margin has improved from the freeze quarter by 14 basis points. This is partially because of the higher deposit, a higher loan increase versus a lower deposit increase that changed the leverage. Again, under the current rate rising scenario, our environment, looking ahead, we're quite positive about our margin expansion. Preferred Bank has a very asset-sensitive balance sheet, and I have included some of the components of our assets for your information in the press release. On the liability side, we had a $1.96 billion of deposit portfolio that is a time certificate of deposits. These deposits carry an average life of 7.3 months, which means they will be repricing at a much slower pace than the interest-bearing transactional account. We have made the improvement in our credit posture. Two of the very large, for the larger Legacy Loans on a non-accrued basis has been with the bank for over two years. Finally, after months and months of core battles, we finally was awarded to repossess these assets, and did so just before the quarter end. Now, our loan portfolio is pretty pristine. was only $2.2 million of non-accrual loans as of March 31st, 2022. There was a charge-off in the quarter. The charge-off is related to the charging off of the previously fully established reserve on those legacy loans. There are no income statement effect. It is almost certain that under a current inflammatory environment that our operating expense will increase and continue to increase in the months and quarters to come. But Preferred Bank has always been very focused on controlling our expenses, and we have reason to believe that our increases will be not any higher than the industry norm. The first quarter non-interest expense was a little higher than previously guided to you in the first quarter conference phone call, in the January conference phone call. And I'd like to apologize for the misguidedness. And the actual number for the first quarter were the beginning will be the beginning of new norm. Also like to alert you with our share counts and on the fully diluted outstanding shares. It has increased this quarter along with the price increase of our stock and it will continue to change along with the value of our stock changing. All in all, we at PreferBank are happy with the first quarter, and we hope we can do even better in the quarters to come. Thank you, and 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 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 two. At this time, we will pause momentarily to assemble our roster. The first question comes from Gary Tenner with D.A. Davidson. Please go ahead.
spk11: Thanks. Good morning. Follow-up. Lead your comments on the expense level as the new norm. You know, if you kind of annualize the first quarter, you're around $65 million. That's 7-8% growth on top of 2021. Is that the general perspective on the full year increase in expenses that you would expect, or is there any, you know, kind of further upward pressure as we go through the course of the year, do you think?
spk10: Well, Obviously, it's quite unpredictable with the expense going in the future. There's several forces related to it. The number one, obviously, inflation. What would it do to all of us, especially in the wage category? And also affecting us with the renewal of our premises on the leases. Some of those come to you and they are subject to increases nowadays. But One other variable is that the success of our recruiting effort. You see, the more successful we are, the higher the expense level will be. So we certainly hope that the expense will be higher because we're successful. So generally speaking, first quarter was slightly higher than the second quarter. But in this inflationary environment, It is, you know, we have to provide as little flexibility of thinking.
spk11: Okay. Thank you. And just on the recruiting effort side, I mean, I know you guys are, you know, always looking to add quality people. Is there a particular geography or market that you're, you know, particularly focused today on?
spk10: We are recruiting from our geography right now, okay? So we're adding people all over. but also that we are eyeing that couple of new areas to put a new branch in. If we decided in the location and so on, then we'll be hiring a group of people in that particular location. I have better information to report probably next quarter.
spk11: Okay, great. Thank you for that. And then just last question for me in terms of kind of operating leverage, I mean, you know, You provided some good detail on the asset sensitivity as it did last quarter in terms of the adjustable rate assets. It would seem to me that you're still going to generate some positive operating leverage, but with the increase in expenses, reasonable to expect that efficiency ratio to kind of stay over 30% below it for a period of time last year. Is that what you would expect?
spk10: You mean efficiency ratio? I would like to see the two situations. One, you have an increasing net interest income, okay, which as a result of the growth and as a result of the margin expansion, these two will create a higher net interest income. And then obviously you have higher expenses, but we hope the combination of the two will be right around 30% level, we hope, within a certain range, obviously. We have been bouncing back between 28 to about 35% between the month and stuff.
spk11: All right, thank you for taking my questions.
spk03: Our next question comes from Matthew Clark with Piper Sandler. Please go ahead.
spk05: Hey, good morning. Could we just start with, on the loan side of things, Were you able to quantify the new loan commitments in the quarter, how that compared to last, and payoffs as well? And then maybe it's a three-part question, just any commentary on the pipeline and how that compares to the prior quarter or a year ago?
spk10: You know, prior quarter, we had a $360 million new loan, I mean, new loan outstanding and not the commitment outstanding, okay, for the quarter end, okay? And then we have a $250 million payoff, okay? So this particular quarter, the payoff has reduced from $250 million to $180 million, was approximately the same activity in the origination side. So this is the mathematics.
spk05: Okay. And then any color on the pipeline this quarter, coming out of the quarter?
spk10: Pipeline is good. Not any worse than the first or second quarter.
spk05: Okay. Okay.
spk10: And then... As I said earlier, nowadays, the underwriting standard is higher because of various stress tests and value situations in light of the inflation and rate increases. And also that we have always in the back of our mind that after inflation, there will be a recession. So we have always... try to alert ourselves at Preferred Bank that good loans, bad loans are made at a good time, so we'll have to be extremely careful now.
spk05: Okay. And then on the margin outlook, kind of thinking through the remix as it relates to deposit growth relative to loan growth, I mean, do you feel like loans to earning assets will might continue to march higher, assuming deposit growth kind of trails, or do you feel like deposit growth should come back and start to better fund the loan growth?
spk07: Hi, Matthew. This is Ed. To Mr. Yu's comment earlier about the loan growth coming in lower than previous quarters and within our expectations, I think you touched on something I think we'll see throughout the year. With the M1 supply seemingly going to start shrinking when the Fed ends its QE and also starts to raise rates, we're okay with a lower level of deposit growth and then fully more utilizing the cash in the balance sheet toward the loan portfolio, obviously expanding the margin and leveraging the balance sheet.
spk05: Got it. Okay. And then just on the provision, there was a comment in the release that part of the basis for it reducing reserves was an improving economic outlook, and I would have thought that would have been the opposite in terms of commentary and assumption. Should we assume that that kind of reverses itself here in the upcoming quarter and creates a provision?
spk10: I will ask Nick to answer that. I will add on.
spk09: Sure. Hi, Clark. This is Nick. For the reserve side, even though the current economy seems like at okay stage, but still we have a lot of other uncertainties that we have concerns, such as labor power shortages, high inflation, supply chain interruptions, you know, all those kind of things, quick rate increase environment, and the higher energy cost. And also, as Mr. Yu mentioned, increase the possibility of a future recession. So, even though under that kind of a situation, we, for this quarter, we still add on a little bit more reserve on the qualitative side. As Mr. Yu mentioned, we try to take a more cautious posture at this time. I guess we're scared .
spk07: Yeah, I think it's probably safe to say the release might have been larger. had we had more rosier economic predictions within the CECL model rather than what it came out to.
spk05: Understood. Okay, and then last one for me, just on the letter of credit fees, how should we think about that activity in a rising rate environment and a slowdown in the macro environment?
spk08: I think it would be probably pretty stable
spk10: now. It's also, you know, you said stable, but I'd like to say sometimes it's very unpredictable. Because LC is such that a customer has a need to come in and say, open up LC for me. So we charge them a fee. So the activity is, you know, it is really customer specific. I mean, it's hard to relate to any economic conditions now. We tried. We tried to try to make a pattern on that. We haven't gained success on I'm predicting it yet. Understood.
spk03: Thank you. Our next question comes from Steve Moss with B. Reilly Securities. Please go ahead.
spk02: Good morning. Hi. Let me just start off with deposit pricing here. In the release, you guys talk about CDs repricing at a slower pace. Just kind of curious here. You know, what are you guys thinking for, you know, CV rates with the 50 base point hike coming up here in May in all likelihood? And just also just how you're thinking about deposit betas more broadly. Yeah.
spk10: Ed, do you want to answer that?
spk07: Yeah, I'll start off. In terms of, you know, deposit growth going forward, I think we're okay with a lower level. But in terms of deposit betas and rate changes going forward, Steve, we're seeing an interesting thing, at least in my opinion, I'm seeing an interesting thing in the market. We're really not seeing much movement at all on the retail side of things. Wholesale funding has moved a lot. It started moving in January. But the retail funding is still, we get rate surveys every two weeks that we go through very extensively. And we are still seeing very few banks move beyond 40 to 50 basis points on a one-year CD. And so what I think you're going to see this time around, you know, you hear this all the time, this time it will be different, right? But this time around with the economy and the consumer and businesses do still have a lot of cash on hand. And so I think it's going to take some time to whittle that out of the system going forward. And as that happens, I think you'll slowly see banks start to raise their offered rates. But at the present time, we're just really not seeing a lot of movement. So it's a little bit like a Goldilocks moment right now, at least for the time being.
spk08: Do you have anything to add? Okay. I mean, Ed and I, we review this weekly. And so far, we are holding very well on the consumer side on the retail side, I should say, but no. Okay.
spk07: And then on the wholesale side, a lot of those are negotiated rates anyway. So those, those still are fairly low as well.
spk02: Okay. Got it. That's helpful. And then in terms of just, you know, on the loan pipeline being strongest, maybe what types of lending opportunities are you, are you seeing? I mean, obviously I had good commercial real estate growth here this quarter and I'm just kind of curious, like, the underlying types of properties you guys are lending on or you expect to lend on here going forward. And just when we think about loan growth for the year, you know, obviously a really strong pace here. You know, are you guys thinking, you know, low teens type number, XPPP?
spk10: You want to answer that?
spk08: Sure. We are always looking for new talents, as you mentioned earlier. So whether it's a... you know, we're looking for talents. Talents will take the lead or we're going to expand, whether it's Southern California, Northern California, or elsewhere. And in terms of the, we're looking at the market and pipeline right now. I think post-pandemic, there are a lot of opportunity. People are looking to acquire property and looking to reposition. And so a lot of opportunity in multi-family and industrial type of facility.
spk02: Great. And then just in terms of the tighter underwriting standards here, just remind us kind of what the debt service coverage or loan-to-values you guys are looking at these days.
spk09: Yeah, loan-to-value is our current data is around 55% to 56%. And this year, definitely, as Mr. Yu mentioned, that they were very conservatively underwriting the loans with consideration of future rate increase. So currently it's around 1.2 and above. Okay.
spk02: And then just one last question, a small one in terms of the OREO properties that you guys took over here. You guys made comments about resolving it shortly. Just kind of curious as to how quickly you think you can liquidate them.
spk10: We hope it's done yesterday. We had an offer. But things should be, the property is well sought after. So Volcker is telling us that they feel that the price is very advantageous to us under the current market. OIU is...
spk02: Great. Well, thank you very much. Appreciate that.
spk03: Our next question comes from Andrew Terrell with Stevens. Please go ahead.
spk01: Hey, good morning.
spk03: Hi, Andrew.
spk01: Hey, maybe just to start off, I hear some of your comments on kind of the deposit growth expectations and just the overall kind of leverage of the balance sheet. Just I'm looking at there's still quite a bit of excess cash, it seems like, on the balance sheet today. I guess just given the move in interest rates we've seen so far, any appetite or willingness to take kind of a bigger swing into the securities book here?
spk07: Great question, Andrew, and I'll say at this point the answer is probably a no. We took a little bit of a swing last September and bought almost 200 million of monthly GINI floaters, which have actually performed pretty well. But to the extent we can more utilize the cash into the loan portfolio, and then remember also that cash is also going to move up in rate, too, as the IOER portfolio rate moves in lockstep with Fed funds, we'll see that cash benefit as well. So that's a nice production of that. So we are not going to forego deposit growth. Let me be clear on that. We still believe in deposit growth, and that does form the foundation of the bank or the franchise value of the bank. So we will get deposit growth this year, but we will not be as hard-pressed for deposit growth this year.
spk01: Understood. Okay. That's helpful. I appreciate it. And then maybe looking at just the core loan yields while we're on kind of the margin, down I think maybe 10 basis points or so this quarter. Anything unusual in the kind of core loan yields, whether it's interest reversal, lower fees or anything, just anything maybe non-core in the loan yields this quarter?
spk10: No, we don't have it. Go to you.
spk07: No, but I will say we did see a small uptick after the rate, after the mid-March Fed hike. And we saw that also on the cash side. So that's beneficial.
spk01: Yep. Okay. And then one last question for me, Mr. Yu. I know historically you've not been very active in kind of bank M&A. I just wanted to get kind of updated thoughts from you, whether you were seeing anything kind of interesting on the M&A front, whether there was any appetite if it kind of plays into your thinking about running the bank moving forward? Just any kind of out there thoughts on bank M&A would be helpful.
spk10: Number one thing is that maybe it's our DNA, okay? We're a little bit on the conservative side of our acquisition situation. So we look, and there's continuously, obviously, intermediaries that was introducing deers to us. For various reasons, either pricing, all the talents, all the geography, we have not had much success. A couple of deers were getting close to step number two, but it seems to be didn't materialize any further. And our calculation about the accretion requirement is probably one of the tougher in our industry. One of the reasons is that we can internally generate, I mean, more than 15% of growth as average, and the need for acquisition to increase the balance sheet is not that imminent. And therefore, we choose the most profitable way of, I mean, organic growth. So needless to say, when the organic growth started to fade in our stock, We have to think about how to make this institution more profitable. And I hope the acquisition we make will be profitable because, as I know it, not every acquisition will work out very well. It just doesn't show up in financial statements enough, in bold letters.
spk01: I hear you. Any kind of color you can provide on just what that, you mentioned the internal kind of EPS accretion or I don't know if it's IR threshold or that you need to meet, or tangible book value earned back, any kind of color or specifics you can give there on the financials you kind of try and target?
spk10: Well, obviously, there's two things that I'm looking at. I don't look at IR that much. I just look at the accretion of the EPS. And then also the important thing to me is how much is dilution of the book value and the payback on the situation. You know, inflation is you really take a target, you're prepaying for whatever the their earnings for many, many years and hope you can make it back through efficiency and combined operation. And we must be cognizant that not everyone is going to be perfectly executed. So we're just looking at very careful as the book value deletion side of it.
spk01: Yep. Understood. Okay. I appreciate you guys taking my questions and congrats on your quarter.
spk03: Thank you. Our next question comes from Tim Coffey with Jani. Please go ahead.
spk04: Great. Thank you. And thanks for taking my questions. Ed, the press release has got some really great color on the asset sensitivity of your balance sheet. And you are one of the most more asset sensitive banks on the West Coast. I'm wondering, can you quantify what the gain to net interest income would be, say, off of a 50 basis point move higher? Off the top of my head,
spk07: Unfortunately, I can't right now. I can tell you that in a 100 basis point shock, I think we're about 9% to 11% higher on an annualized basis.
spk04: Okay. That's helpful. And then can I ask a question about the cadence of loan growth in the quarter? did the increase in rates pull forward any business towards, say, the March month relative to January or February?
spk10: I guess the increased rate actually has created more opportunity to us because previously that most, we lose many, many of the payoffs is to the people who are offering low rate fixed rate loans in 10 years sometimes, okay? Some of them is doing 10 years interest only, 10 years interest only. We're losing to these days when we're thinking about race, it's going to change. And while getting to the fixed rate situation, while we're pondering about that, we keep on losing loans, losing competition. I mean, competition for loans on that reason. And thank God, everybody started thinking, I mean, they should not be making low rate fixed rate loan anymore. Okay, so, so we become an equal basis of competition, where our, I think, a competitive advantage of high touch one on one service, delivery and customer relations start to come back in benefiting us.
spk04: Okay, that's good to hear. Then I would is your expectation that you know, pipeline fallout will decrease going forward?
spk10: Yeah, I would say that it would decrease, although the one caveat is that we have to underwrite it more carefully. Right.
spk04: Okay. That makes sense. And then speaking of that, the reserve levels of the ratio, do you feel like it's prudent to start increasing that ratio right now, or do you need to wait for more information before doing so?
spk10: Are we talking about our credit quality situation?
spk13: Yeah, loan review.
spk10: So we actually, and I'm going to answer in different ways about it, okay? And I just reported to a board, says we will be starting internal loan review again in the late second quarter, early third quarter. In light of two situations, I mean, one is a continued high inflation. What would that do to many of our customers industry or customer specific? And we're also to project after the inflation situation or the recession situation come, which of our customers likely to be affected. So we can take proactive moves in relating to these things. And the bank wide review will be starting in late second quarter or early first third quarter because we do have an examination scheduled in late second quarter. We like to take care of the examiners first. So on the CIE side, obviously, we went through many, many drills before, but we plan to do the same drill in the third quarter and looking at it as what product line is for all the fall out of the market situation, what product line is continuing to be the favorite investment. But it's safe to say, and it's just speaking from common sense and my past experience, when the early stage of inflation, there's many, many of our customers, astute customer, is really trying to acquire real estate because they think over the long term and they have the holding power they think over the long term, assets is the best protection for the inflationary situation. So, while we are also cognizant about that, but we still have to do our assets review on the other thing.
spk04: Male Speaker 1 Okay, I appreciate the comment.
spk07: Male Speaker 2 To answer your question, would result, depends on the results of the review that Mr. Yu spoke of, Tim, whether, you know, how we look going forward relative to the ACL.
spk04: Right. Yeah. Okay. No, that's great. I appreciate the color. Those are my questions. Thank you very much.
spk03: Again, if you have a question, please press star, then one. Our next question comes from David Feaster with Raymond James. Please go ahead.
spk06: Hey, good morning, everybody. Hi, David. Mr. Yu, I just kind of wanted to follow back up on your commentary, kind of talking about the competitive landscape. It sounds like it's a bit more rational than it has been. But, you know, as you think about your adjustable rate loans, how effective – have you been able to fully push through that 25 basis point increase on the $1.4 billion of loans that reprice immediately? And I guess just with the competitive landscape, how do you think about your ability to push through the next couple rate hikes? Like if we do get a 50 basis point rate hike at the next two meetings, would you – expect to see more payoffs and paydowns as competitors price lower? Or I guess just how do you think about your ability to push through higher rates on these?
spk10: Each cycle is different. But however, in this cycle, what I can see is that our margin, meaning the index number, is competitive with other, I mean competitive with the offers. In other words, If the loan is worth P plus half, everybody's offering P plus half. So right now, for other people to offer much lower index number to the loan, I don't see many of our competitors doing that. There's always been few over there, but I don't see a majority of people would be doing that. And I just think they are equally as sensible as we are. So I actually do not think that we'll lose a lot of business because many of the things we push to higher rate due to the loan. More so, if anybody wants to do that, it's because the economics of their own thing. It's owner-driven.
spk06: Okay. So are you starting to see new loan yields improve? Have you seen like an inflection in new loan yields? across the portfolio?
spk10: In the last few quarters, I have told you that all the loans paid off is rate is anywhere from 75 basis points to 50 basis points higher than the loans being made. This quarter, the number has narrowed down to 26 or 27 cents. Okay? So I have a feeling on the situation the second quarter, the new loans will carry a better rate.
spk06: Okay. Okay, that's helpful. And then just, you know, on the CNI growth in the quarter, that was great to see. Just curious whether you think that that was a function of drawings on existing lines as borrowers are starting to build inventories, or are you seeing increased demand for new lines? And then just what are you hearing from CNI clients and How is the CNI proportion of your pipeline? Has it increased at all, or is it still kind of that 70-30? I think we talked about that.
spk10: I'll answer Wellington's comment, okay?
spk08: Hi, David. It's Wellington. It's not necessary, not much from the existing line drawdown. We had a couple good wins on the new CNI relationship, and really that's where really many is coming from the growth. Okay.
spk06: That's helpful.
spk13: Yeah.
spk06: Thanks, everybody.
spk03: Our next question comes from Jordan Himowitz with Philadelphia Financial. Please go ahead.
spk12: Hey, thanks, guys. Before I ask my question, Lee and team, I just want to say I've covered you guys for 20-something years since the IPO. You've done not only a great job, but the integrity and thoughtfulness and your willingness to say when things are better or worse. It's really refreshing. You guys deserve a great kudos. So good job. And after the commercial for you guys. Thank you.
spk13: Thank you, Jordan.
spk12: Made my day. I have a question for you on the follow-up to the other gentleman's M&A question. And I'm not saying you should or shouldn't do M&A. That's a different thing. But with RBB's chairman now resigning because of improprieties, there's rumors that that may or may not go on the market. who knows, but would that be a property at a certain price that you might be interested in?
spk10: Well, number one, well, the situation, and I have at least among the group of firms that was represented here today, at least two or three has contacted me on this particular thing, except none of them knows them as well as I do, okay? Many of the board members, my friend, okay, and obviously the former chairman, former president CEO was a long time, long time friend of mine, too, you know, so I know the situation. Okay. And it's a matter of their expectation. And it's a matter of just after they have stabilized the situation, whether their business level, how much will represent represents a vibrant ongoing businesses are sort of like, you know, slow growth business. So It depends on the price. Unless I can deliver you guys, your shareholder, I can deliver to you a better future year by year. Why should I do that?
spk12: Okay. Thanks so much. Congratulations, and I appreciate it.
spk10: Thank you.
spk03: This concludes our question and answer session. I would like to turn the conference back over to Mr. Lee Yu for any closing remarks.
spk10: Thank you so very much for joining our conference. You have any question, please call Ed and I, or I, okay? More so Ed and me, okay? But anyways, okay? But we'd love to answer that. Thank you so much, okay?
spk03: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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