Preferred Bank

NASDAQ:PFBC

Earnings Call Transcript 2024-Q1

[Operator]

Good day and welcome to the Preferred Bank First Quarter 2024 earnings call. [Operator Instructions] This event is being recorded. I would now like to turn the conference over to Jeff Haas with Financial Profile. Please go ahead.

[Jeffrey Haas]

Thank you, Nick. Hello, everyone. Thank you for joining us to discuss Preferred Bank's financial results for the first quarter ended March 31, 2024.

With me today from management are Chairman and CEO, Li Yu; President and Chief Operating Officer, Wellington Chen; Chief Financial Officer, Edward Czajka; and Chief Credit Officer, Nick Pi. Management will provide a brief summary of the results, and then we will open up the call to your questions.

During the course of this conference call, statements made by management may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based upon specific assumptions that may or may not prove correct. Forward-looking statements are also subject to known and unknown risks, uncertainties and other factors relating to Preferred Bank's operations and business environment, all of which are difficult to predict and many of which are beyond the control of Preferred Bank.

For a detailed description of these risks and uncertainties, please refer to the SEC required documents the bank files with the Federal Deposit Insurance Corporation, or FDIC. If any of these uncertainties materialize or any of these assumptions prove incorrect, Preferred Bank's results could differ materially from its expectations as set forth in these statements. Preferred Bank assumes no obligation to update such forward-looking statements.

At this time, I'd like to turn the call over to Mr. Li Yu. Please go ahead.

[Li Yu, executive]

Thank you very much. Good morning. I'm very pleased to report that Preferred Bank's first quarter net income of $33.5 million or $2.44 per fully diluted share. This quarter, our loan growth was annualized at 4% and deposit growth was 6.5% annualized.

This quarter, our net interest margin was 4.19%, which is a slight decrease from previous quarter. Looking ahead, the second quarter NIM likely will also compress, but we don't think it's going to be very significant. It's going to be mild compression from there. The reason for the compression in the first quarter is continued increase in cost of deposits.

As of March 31, total criticized loans is $87.6 million, which is $3.6 million higher than $83 million at year-end. I know there's a massive mistake somewhere, but up to -- you have to round all 3 members from there. And the nonperforming loans has reduced from $28.7 million at EM to $18.2 million in the first quarter end.

This quarter, we have a charge of $3.5 million related to loans that previously identified with loss content and fully reserved for [indiscernible]. This quarter, our provision is $4.4 million. The reserve allowance now stands at 1.49%.

On the business side, we have just opened a new branch in Orange County airbine area. This is a full service brands staffed with a team of deposit personnel and the team of now personnel. We also practically as a right now of this minute, open up a -- certainly the loan production office in the Silicon Valley area. And we plan to continue to add relationship personnel in the remainder of the year.

Since third quarter last year, we have been trying to reduce the sensitivity of our loan portfolio, okay? And as of today, we believe is a much better balance with our deposit composition. With the current changes in trend of interest rate movement, we will obviously monitor the situation and making the necessary adjustment to control our interest rates risk even better.

Thank you very much, and I'm ready for your questions.

[Operator]

[Operator Instructions] The first question comes from Matthew Clark with Piper Sandler.

[Matthew Clark, analyst]

Maybe, Ed, just to start on the NIM. I'm trying to get some visibility into 2Q, if you had the average NIM in the month of March and the spot rate on deposits at the end of March.

[Edward Czajka, executive]

Yes. The -- I was ready for you, Matthew. The NIM for March was [ 4 11 ]. Spot rate on deposits was 4.04%.

[Matthew Clark, analyst]

Okay. And that 4.04% at the end of the month or was it the average in March?

[Edward Czajka, executive]

That's the average for the month, yes.

[Matthew Clark, analyst]

Okay. Got it. Okay. And then I think you all hired some producers in the fourth quarter and you had some good growth in both loans and deposits. I wanted to get a sense for your pipeline of loans and deposits and your growth outlook for the year?

[Li Yu, executive]

Well, first of all, the -- I don't think we have had too many people in the fourth quarter but also in the first quarter, okay? When you add the relationship officers usually it takes about 1.5 to 2 quarters before they can materialize into the portfolio start to materialize. And also, as you probably know, in our business that for every 10 people you hire, you hope everyone works but not necessarily, okay, but we just -- hopefully, there will be some stars that balance of the whole situation. With the pipeline -- and Wellington, do you want to explain the pipeline first?

[Wellington Chen, executive]

Well, thank you, Mr. Yu. Matt, our pipeline is pretty healthy. I think that we are really, as Mr. Yu mentioned, that really focused on taking care of our existing customer. And right now, there's quite a bit of opportunity for them, and that's our priority. So in turn, yes, that's where we are. The pipeline is pretty healthy.

[Matthew Clark, analyst]

Okay. And then the -- sorry, the other question I had, I think was, yes, around the CD repricing. Can you just remind us what you have coming due over the next couple of quarters and the rate differential and when that gap might close or completely?

[Edward Czajka, executive]

Yes. So we have Q2 TCDs of about just under $1 billion maturing. They're at an average rate of 4.9%. So we don't see a lot of differential there with respect to what's going to be maturing with respect to what's going to come back on. Q3, that number dips a little bit to $374 million in terms of maturities. So we don't expect a lot of movement on the standpoint on the deposit side from TCD rates going up dramatically from the portfolio rate that we're at right now.

[Matthew Clark, analyst]

Okay. And then just on credit, can you remind us of the nonperformer that you're able to sell at par, what type of credit that was, obviously, great to see. And then just the incremental increase in criticized. I know it wasn't a big number, but just would like some color there.

[Li Yu, executive]

Well, obviously, these things are coming in and out and has a different time in different stages on. Some of those criticized loans will migrate into the nonperforming area. And we have -- obviously, it is our job to identify them in the very early stage to provide the proper reserve on whole situation, okay, so that the loss content has been accounted for and will not be affecting the future years, okay? So with your question, Nick, you have anything to add? .

[Nick Pi, executive]

Not really. Just to give you a little bit more color about those 2 loans related together, we sold the note at the park plus a little bit small premium on that. So just like Mr. Yu mentioned, is migration in and out. for credit. So I believe we didn't notice any significant trend of credit site.

[Operator]

The next question comes from Andrew Terrell with Stephens.

[Andrew Terrell, analyst]

My first question was around just the loan yield expansion you saw this quarter, 7 basis points sequentially, it was up pretty nice. I was just curious, was there any kind of outsized interest recovery or anything like that, more onetime in the 1Q loan yields? Or was this more just a function of low growth and kind of churn in the portfolio towards higher rates?

[Edward Czajka, executive]

Yes. Good question, Andrew, and good pickup there. We actually had a prepayment penalty on a fairly large credit in the month of March, a little over $200,000, and that helped to drive yields just a little bit.

[Andrew Terrell, analyst]

All right. Just a little above $200,000? .

[Edward Czajka, executive]

Yes.

[Li Yu, executive]

Yes. Those things happen in each quarter, we hope that we have some prepayment in the quarter, although it was varying [indiscernible].

[Andrew Terrell, analyst]

Understood. Got it. Yes, we'll hope for more. On the -- I was looking at a comment from your earnings release around the rate sensitivity position and kind of some adjustments on the loan portfolio to maybe dampen out that sensitivity. But looking back at the annual report, I think you guys are disclosed down 7% to NII with negative 100 basis points in short-term rates. Has that moderated significantly as of the 3/31? Or can you just speak a little more to how the balance sheet has tempered in terms of rate sensitivity?

[Edward Czajka, executive]

Well, it has tempered. I can't give you the number right now on the down [ 100 ] scenario, Andrew. But suffice to say what Mr. Yu was alluding to earlier is a number of things, doing a few more fixed rate loans than we've done in the past. And with respect to loans that are renewing or coming up for renewal if their remaining floating rate, we're moving the floors up from where they were previously.

[Li Yu, executive]

Fixed [indiscernible]. Now, I can give you a rough number right now. I cannot tell you the exactly down [ 100 ] pieces [indiscernible]. We haven't got a chance to do that. I think previously, we would disclose to you our -- I mean, rate-sensitive as loans. It's about 80-some percent -- 80-some percent. I can't exactly about it. Now we're down to about the mid-70%, okay, or maybe slightly lower than men. So if you compare to the liability sensitive liability we have, that we're in pretty good balance right now.

[Andrew Terrell, analyst]

Yes. Okay. Yes, the mid-70s is, yes, definitely a big move. That's really helpful. I appreciate it. And then maybe one on the expense base. Just expectations on kind of the 2Q expense run rate. I know there's -- it looks like maybe a new LPO opening, just curious on how you see expenses trending in the second quarter?

[Edward Czajka, executive]

So a number of things that Mr. Yu and Wellington alluded to, we have the new Irvine office, which is in a prime, prime location in Orange County and the Culver Center in Irvine. In addition to that, the Silicon Valley LPO, both of those require staff as well as lease costs. So I think going forward, I think the $20 million you saw this quarter is probably a fairly plus or minus going forward for next quarter. Okay.

[Operator]

[Operator Instructions] Our next question comes from David Feaster with Raymond James.

[David Feaster, analyst]

We -- you touched on the two NPAs, but I was hoping to get your thoughts on credit more broadly. You've got a track record of being aggressive managers or credit. I'm curious what are you seeing more broadly in the health of your clients? Where are you seeing any signs of stress? And just any thoughts on credit more broadly from your perspective?

[Li Yu, executive]

Okay. Let me state that from way back, let's say, in 2022, okay, a little bit earlier when we started to worry about the rates and credit and so on and inflation and so on. If I have seen a thought that the with this period almost 2 years gone by with the charge-offs we have and the loss we have had and the level of NPLs and the level of criticized assets is as today, I wouldn't be so happy those days, okay. But as you know that one of the tricks in the dealing was credit is try to identify early and try to fully reserve that, okay? So that's our basic principle. But talking about with our customer is concerned, most of our customers started to turn a little bit more positive. And basically, obviously, inflation is one factor that is down. And another factor, the rate is stabilized, although everybody would like to see it down a little bit. But all we all know from this point in time, sooner or later, it's going to be lower. It's a matter of whether it's half a year or 1 year or whatever. Sooner or later, we'll be back on that.

And from what I read for all the big banks reporting numbers, their credit positives also better than expected and are internally expected or what, okay? So generally speaking, I think the marketplace start to see the light at the end of the tunnel. In fact, many of our more opportunistic customers started thinking about new investments. I wonder that you have -- I mean any additional thing related to that.

[David Feaster, analyst]

That's great color. Does that indicate that maybe you're having a bit of maybe less cautiousness and maybe that we should see growth start to accelerate? It sounds like demand is starting to improve. You alluded to improving pipelines. It seems like you strategically decelerated growth from the conversations that we've had -- does it sound -- am I reading between the lines that maybe we could see -- you're a bit less cautious today and we can see growth reaccelerate in the back half of the year?

[Li Yu, executive]

I don't want to be really associated growth being less cautious, okay? I think to put it right, situation is that it finally seems to be that we can take on the opportunity that will be presented to us and we have to be ready. As you know, you had personnel that their production will come maybe 3 to 6 months later, so not immediate effect on that. And the general feeling is that, as I said, to me, I personally believe the big picture is that rates is finally coming down as soon or later, it will stabilized into a new norm situation, which will be reasonably lower than it is today. And although every pricing activity is adjusted in new -- new rate and every pricing net inflation number product number, things will start to sort of like normalize themselves. And with our current strength of the economy, I personally believe that business opportunity has increased, and there will be less risk of doing transaction today as compared to 1 year ago.

[David Feaster, analyst]

That makes sense. Makes a lot of sense. And then last one for me. Maybe just following up on the branch expansion LPO. I love seeing the continued expansion and investment. I'm curious, how do you think about de novo expansion priorities at this point? What other markets are interesting to you? And just kind of curious how you think about -- as you continue to expand? Where are you focused?

[Li Yu, executive]

David, our expansion really has two different directions. One is that the areas we think we have a lot of business, okay, or we want to be. And then the situation is that when we have the personnel. And Preferred Bank is small institutions, almost we can go anywhere and get a reasonable amount of business with a new operation. And therefore, if we are finding the bank as the book of business, we tend to build a team around him and I mean, settle down with the operation there. Having said that, and the silicon value is one of the areas we have wanted to be there. And then we have never been able to get the right person there in the last 10 years or so on. Finally, situation comps, [indiscernible] is able to locate a couple of people he thinks will be feeding to our needs and so -- so we are starting that particular offering. It's the right place for us. And probably the people are the right people [indiscernible].

[David Feaster, analyst]

Okay. That's helpful. And maybe just if I could squeeze one more. You've been real active repurchasing stock curious maybe with potential for organic growth to accelerate and the move in the stock that we've seen. Curious your capital priorities and your appetite for additional buybacks?

[Li Yu, executive]

We have always been letting our shareholders know that growth in the normal situation is our preference as it represents the best long-term value. But within the last 3, 4 years, starting from the pandemic with the inflation and so on, where the bank is making over 20% return with the cost of -- alternative costs in sustain in the 5% range, okay? It does see a good idea that had the idle cash, which we're not doing much along -- nobody is doing much along those with idle cash being staying there making 5%, buyback own stock represents a pretax 33% return. So economics tells me that our shareholders would like to fed it over the long term if we do that.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Li Yu for any closing remarks.

[Li Yu, executive]

Thank you very much. As I said, that we're very happy with the quarter and hopefully, that I personally believe that finally, things started to getting stabilized and going forward I hope it can only be better for the banking industry. Thank you.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.