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spk03: Good day, and welcome to the Preferred Bank second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need any 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 do note that this event is being recorded today. I would now like to turn the conference over to Jeffrey Haas of Financial Profiles. Please go ahead.
spk01: Thank you, Joe. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the second quarter ended June 30, 2022. 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.
spk07: Thank you very much. Good morning, ladies and gentlemen. Thank you for attending our earnings conference on call. I'm very pleased to report that the second quarter of the year was a record quarter in net interest income, net income, earnings per share, loans, and deposits. They all set a corporate record. Meanwhile, credit quality and efficiency ratio was stable. Net income for the quarter was $28 million or $1.87 a share. For the six months, it was $54 million and $3.61 a share. We are the beneficiary of recent Fed rate hikes, and we believe that we'll continue to be benefited by the future rate increases. Highlight of the quarter is the loan growth, which grew $329 million all, 28.6% annualized. For the first half of the year, the loan growth was 22.4% annualized. When they analyzed the outside loan growth in this quarter, And we have found that it was a combination of two factors. One is reduced pay off, pay down activities. Another reason is obviously that we had a strong origination activities during the quarter. In fact, during the quarter, April and May was extraordinarily strong. However, activities tapered off beginning June. As of today, the pipeline looks like that we're back to the level of 2021. Deposit growth was $98 million or 7.3% for the quarter. During the quarter, we have seen that competition for deposits has intensified. mainly led by the major banks. And we believe the deposit cost will continue to increase, in fact, accelerate in the remainder of the year. This is also true because our customers are basically businessmen and savvy investors. They are very good with their money. With recession looming in the air, our focus is also on credit quality. We have already begun to deep dive in our portfolio and so far we have noted not, did not note any deterioration, okay. We're currently in the third week of our regulator examination and I'm hopeful, I hope that there's nothing important will come out through this examination. The non-performing assets increase mainly due to that we paid off senior links on the property before close. Today this property was carried on a bulk roughly 50% below Appraisal values, okay. All other areas of the quarter credit quality such as classified assets and past due counts all seem to have improved from previous year. For the quarter, we have provided $2.9 million of provision that was mainly related to the large loan productions we have. As of June 30th, the bank's total loan portfolio consists of 13% fixed rate loans and 87% floating rate loans. Most of these floating rate loans do have floors. On June 30th, 76% of our total loan portfolio is now fully floating with the next rate changes. And with the anticipated July Federal Reserve action, we believe at the end of June, July, there will be only over 2 or 3 percent of our total loan portfolios is not floating. With this, we believe our interest income for the remainder of the year will increase. We also noted that deposit costs will definitely increase. We do believe the increase in revenue will be more than enough to offset the cost increases. Our $32 million share repurchase program is progressing. As of today, we have completed 24 million of the $32 million that was set aside to repurchase. We hope the whole program will be completed in the third quarter. Thank you very much. I'm out. 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 2. At this time, we will pause momentarily to assemble our roster. Our first question will come from Matthew Clark with Piper Sandler. Please go ahead, sir.
spk06: Matthew Clark Hey, good morning, gentlemen. We'll be starting on the margin. Ed, do you happen to know the average margin in the month of June? And is it fair to assume that the margin expansion in 3Q will be greater than 2Q now that you're fully off the floors? and you get the benefit of, you know, the new loans in the new pipeline at higher indices?
spk10: Michael Heaney Well, the first one is easy to answer. The second one, not so much, Matthew. But yes, the June margin came in significant. I shouldn't say significantly, excuse me. It did come in higher than the average for the quarter. You're certainly correct on that one, about 20 basis points higher than the quarter. As for Q3, we still expect margin expansion, as Mr. Yu alluded to in his comments, read through that, interest income increasing at a faster pace than interest expense. So we certainly expect some margin expansion in Q3. Likely will not be to the extent we had in Q2, but certainly it will be expanding.
spk07: Matthew, just to add on that mathematically, Q3's leverage, meaning The only increase is risk deposit increase. It looks likely that we'll be closer in this particular quarter. So that may be a module for that leverage factor should be considered.
spk06: Okay, great. And then do you happen to have the spot rate on interest-bearing deposits at the end of June as well?
spk10: I do not, Matthew. I apologize. I was sitting here getting ready for this meeting, realizing that was the one schedule I did not have in front of me, the other information I knew from memory. So I apologize.
spk06: Okay. I can follow up. And then on a non-interest expense, in terms of the run rate, what's your expectation for the back half of the year?
spk10: Well, obviously our run rate for Q2 was a little higher than I had previously mentioned. But I would expect Q3 to be similar to Q2. The wild card there is going to be Oreo expense. As you saw during the quarter, we had just under $500,000 in Oreo expense. To the extent that does not repeat, you'll see it down slightly. But we still have pressures. Salary pressures are still ongoing. Obviously, we're in a very inflationary environment. I don't have to tell a lot of people that. Fortunately, these costs are fixed, et cetera, et cetera. But things will continue to go up as we continue to operate in this environment. But we were pleased to see, even though we went over 17 on the expense side, that we still landed at 29% on the efficiency ratio.
spk06: Yep. Okay. Thank you.
spk03: Our next question will come from Gary Tenner of DA Davidson. Please go ahead. Good morning.
spk02: I wanted to follow up a little bit on the margin questions. And, you know, even in an environment of presumably some slower pace of loan growth, your interest income is going to I would imagine, go up pretty significantly just from the rate side. So, you know, Ed and Lee, as you talk about, you know, the outlook for NIM expansion for third quarter when you've got the full benefit of the June hike and, you know, most of a quarter's worth of a, you know, presumed 75 basis point hike next week is surprising to me that it would, you know, that that combination doesn't get you, you know, a little better expansion in 3Q than 2Q. So can you maybe just give us some sense of kind of what your deposit rates look like for, you know, right now, you know, in terms of, you know, CDs or other deposits, because that seems to imply a pretty significantly elevated deposit beta kind of the second quarter into a tightening cycle. Okay.
spk07: First question to be answered is that during the Q2 period, Rob, There were two rate increases, May and June. And because many of our loans were operating lower than floor, those times, so not every loan was affected. And especially with the June increases only affecting less than one month. As I reported to you earlier, now 76% of our loans total loan portfolio is now fully floating, we're expecting that these loans will be having an increase that is not showing in the second quarter. So likely the third quarter expansion will be pretty good. But as I said also earlier, deposit is something that I have no control over at this point in time. The reason is that you see major banks, for instance, Citibank and HSBC, their loan, their deposit probably is always the highest in the nation if you look at the postage rate records. And Citibank is offering a deposit account, effectively giving people 3% when you put a new TDA amount. And Goldman Sachs Markets Bank is having TCDs at 2% upside kicker, adjustments meaning. So with these situations in the picture, that every bank I expect will see their deposit cost increases. Water always seeks its lowest level. And it's a matter of each institution will be different in terms of the speed in getting to that particular level. And as also reported, we are a businessman. Our investors' profile is different than many of the banks' because there's so many consumers. So we're expecting also a little bit faster pace in our cost adjustment.
spk10: Gary, on the CD side, I think you asked one year. We're offering 118 right now on one-year CDs. To add on to Mr. Yu's point, obviously we know the CD portfolio and how that rolls off and rolls back on, but it's that large money market. interest-bearing transaction account portfolio, where there are some larger clients in there. And as Mr. Yu said, they do manage their money very closely. So we have to keep up.
spk07: To illustrate that, beginning in April, we have customers just break their CDs, pay the penalty, put the money in treasure paper. Those days, you're making 2%. And we also... Now they will see customers all over the place break their OTCD, pay a small premium that was because this OTCD rate was very low. They are holding an account waiting to reinvest when the rate changes. Some of them have already reinvested. Many of them have not. So these are the actions. It's hard to quantify that at the early stage of the quarter.
spk02: All right, guys, I appreciate the call.
spk07: I don't try to be evasive, but that's the fact.
spk03: Our next question will come from Andrew Terrell with Stevens. Please go ahead.
spk05: Hey, good afternoon or good morning.
spk03: Hi, Andrew.
spk05: And maybe just ask the margin question just in a little different fashion. You gave us the month of June was, about 20 base points higher than 2Q average, which I guess put us just a little bit south of 4% on the net interest margin in June. Do you think in 3Q22 for the full quarter average, you still see expansion from that just shy of 4% level?
spk10: Oh, absolutely. Yeah, no, there's no question. I didn't want to be misunderstood on the earlier comment. I just wanted to temper the fact that we will see margin expansion, but will we see 30 basis points of margin expansion? I don't know. I'm not necessarily expecting that much, but it will be good.
spk05: Yep. Okay. I guess for Mr. Yu, kind of a bigger picture question um i guess with even more kind of rate hikes coming through and you're already putting up really solid profitability i would think you'll become even more profitable capital is already in a solid spot so i guess my question is more on just on the reinvestment side where are you focused on making investments today and then are there any investments that may have been kind of longer term that you're now kind of more comfortable focusing on and spending on, just given the improved rate backdrop and the improved profitability profile?
spk07: We actually, I mean, is cautiously stepping forward. First of all, that, you know, we know we're accumulating capital in a faster pace, but in the meantime, I have to worry about the economy, whether when the recession is coming already here, how long the recession, how severe it is, you know, in this game cannot afford to make mistakes. So we likely we're going to be cautious of holding the capital before we commit to it. When we ready to do it is obviously dividend will increase. And we will seek obviously, additional buyback. And we also probably would put some of our money in the insecurities i hope by then the prices is uh is much more attractive so these are the areas that we would do okay okay that's helpful i appreciate it um and then another one for me kind of on rate sensitivity um we've heard some
spk05: Some other institutions talk about kind of tempering, especially asset-sensitive institutions, talk about tempering their rate sensitivity kind of as we progress through the cycle. Is that something just given how asset-sensitive you are that you would consider doing as we kind of approach, I guess, a much higher rate cycle?
spk11: Andrew, can I ask how you talk about rate tempering? Can you elaborate on what that means?
spk05: Yeah, I mean, I think banks are doing it in kind of a variety of fashions, but just trying to, I would assume mainly just through swaps, but just tempering rate sensitivity with that lever.
spk07: Well, obviously, when we get to this later stage of the increases, we will think about our pricing on loan in different manners, and we will certainly adjust a full-on formula to make it more market competitive. We may want to consider doing a whole lot more fixed rate loans by that time. But all this is we have to just be careful every month, every week, every month in going forward. And we know that by the end of this year that we need to really take a serious look about how to reposition our total portfolios.
spk05: Okay, great. Thank you for taking my questions. I appreciate it.
spk03: Our next question will come from Steve Moss of B. Reilly Securities. Please go ahead. Good morning.
spk04: Maybe just one last question on liabilities repricing here. It sounds like obviously you're seeing changes in customer behavior. Just wondering what's the duration of the CD books? these days, kind of sounds like it's probably shortened.
spk10: I believe it's between five and six months right now, Steve. Okay.
spk04: And then that's helpful. And then in terms of just on the loan pipeline here, you know, you guys had a great quarter of loan growth. You know, do we see something that carry over here into the third quarter? before maybe tapering off to more typical levels, just kind of get a feel for near-term trends.
spk07: Why don't you answer that first again?
spk09: Well, we look at it as the second quarter was extraordinary, and I think that our pipeline continues to be quite healthy, but it will not be repealed the second quarter. It will probably taper down to, I would say, as Mr. Yu mentioned earlier, the 2021 level. Okay.
spk04: Great. And then just kind of curious on loan pricing, where are you guys putting on new loan yields these days?
spk07: If you pay on credit, then generally we put on five-day loans, okay, with the floor, okay? Loan pricing would be anywhere between five to five plus one-quarter. I mean, that's the most happening in our range, okay? And usually the floor will be the starting entry rate of the loan.
spk04: Okay. Great. And then in terms of just kind of, you know, I hear, I hear Mr. Yu on terms of, you know, a more, more concerned about the reserve and are more concerned about the economic outlook. So how do we think, how are you guys thinking about the reserve? You know, what's the, are you going to be at, do you expect to add more qualitative factors maybe to the reserve as we go forward or just kind of provision expense probably tracks loan growth?
spk07: I will let Nick answer that, but I want to tell you, our qualitative number is already compared to industry. Our qualitative factor is fairly high.
spk08: Yes, currently we are higher than our peer groups at this time. So to answer your question, Steve, that management is still continuously applying kind of a cautious posture when reviewing both quantitative as well as qualitative sites. and also kind of, you know, try to be a little bit conservative on exposure supporting the forecast and also Q factor side because there's a lot of economy uncertainty lying ahead. So it's kind of a mixed kind of indication to to the bank for a reserve site. So there's some of the negative things, GDP negative and supply chain disruptions and freeze of hiring, unemployment rate may be coming back. We don't know. This morning we have initial climb higher than I expected. On the other side we have a good retail sales and we have still lower unemployment rate at this time. Mortgage side has been dropped a little bit. So we still take like cautious kind of posture at this time when we look at the reserve and definitely just like Q2, we check up a little bit on our external economy factors to set aside a little bit more reserve. Mr. Yu.
spk07: Mr. Well, thank you. I have nothing more to add, you know.
spk04: Okay, one last one for me. Just on the Oreo property here, I'm just kind of wondering on the status on this position. I recall it being, you know, you guys mentioned a desirable property. Is that something that could be off your books in the near future here?
spk07: Nick, I'd like you to answer that.
spk08: Yes. Well, firstly, I'll take the title now, and we'll work aggressively with the local organization reputable broker and get the house ready for the marketing this coming Friday, I believe. It's officially put on market for sale, and we hopefully by Q3 or Q4, we can get rid of this ORO property.
spk07: By the way, this property is a luxurious house, about 10,000 square foot on the block in the with the community of Santa Barbara. So in general, that's a so-called quite nice neighborhood.
spk04: I hear you there. All right. Well, thank you very much. I appreciate it.
spk03: Our next question will come from Tim Coffey with JANI. Please go ahead. Great. Thank you.
spk12: Thanks for allowing me to ask some questions. If loan growth is going to revert to, say, the 2021 level, does that imply a, say, low double-digit kind of annualized growth rate?
spk07: Yeah, we generally will guide in 2021 between high single to low double, okay? So hopefully that we can maintain the same level of growth in 2021, which is a low double-digit.
spk12: Okay, okay, great. And then, Ed, what's the appetite for bringing on more broker deposits? Look at that line going all the way back to, say, the last rate hike. The balances have been kind of in a narrow range, but this situation seems a bit different right now.
spk10: Did you hear me chuckle when you mentioned broker deposits, Tim? We have no appetite right now, and that's why I think You know, when you look at Q3 and the deposit growth we did manage to get, we let all the brokered money that matured in Q3 run off. We didn't replace any of it. We're certainly not prepared to pay 3% for one-year money from the wholesale market. Obviously, the retail market has not caught up to that, so it's been a very interesting dynamic to watch. But as of right now, we have no appetite for brokered money. That could certainly change in the future, but we obviously have limitations, and we want to stay well below those limitations anyway.
spk12: Okay, understood. Those are my questions. Thank you very much.
spk07: Thank you.
spk03: This will conclude our question and answer session. I would now like to turn the conference back over to Mr. Lee Yu for any closing remarks.
spk07: Thank you very much. As usual, they will stay on the phone. And if you have any further questions, please call us. Thank you for your attention. Bye-bye.
spk03: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
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