Preferred Bank (PFBC) Q4 2021 Earnings Report, Transcript and Summary

Hello, and welcome to the Preferred Bank Fourth Quarter and Full-Year 2021 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, today's event is being recorded. I will now like to turn the conference over to Jeff Haas of Financial Profiles. Mr. Haas, please go ahead.

Thank you, Keith. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the Fourth Quarter ended December 31st, 2021. With me today from management are Chairman and CEO, Li Yu, President and Chief Operating Officer, Wellington Chen, Chief Financial Officer, Edward Czajka, Chief Credit Officer, Nick Pi, 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 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 that 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 would like to turn the call over to Mr. Li Yu. Please go ahead.

Thank you very much. Good morning, everyone. I'm very pleased to report Preferred Bank's fourth quarter net income of $26 million or $1.80 a share. And the full-year earning of $95 million of $6.41 a share. The pretax pre -provision revenue, PTPP together with total assets, together with total loans, total deposits, all these are bank records. In the fourth quarter, loan growth was 2.9% sequentially and annual loan growth was 10.5%. We've had a very, very active fourth quarter. For the loan production. We generated $587 million of total commitment, with $456 million outstanding SGM, which doubles prior quarter’s production. Unfortunately, payoff also more than doubled prior quarters at $333 million. For the full year, we originated $1.7 billion of new commitments, with 1.26 outstanding SGM. However, again, payoff is $890 million. Looking ahead, we have a decent pipeline as of now, but the payoffs will remain in [Indiscernible] I personally am very comfortable with our staff's ability to originate new loans. You see, Preferred Bank is a customer loan shop. Much of our production depends on our one-on-one contact with the customer face-to-face, but the pandemic has taken much of that away from us. And I believe going forward with economy gradually easing -- getting better and the pandemic getting easy, that we should be reasonably optimistic about our production level although it could be lumpy between quarters. Deposit side, we have litter deposit growth in the fourth quarter, but whole year growth is about $17.6 million or nearly $800 million. It is very comforting that most of these grows or 90% of it is on the transactional side of lower cost. Our net interest margin was lower than the previous quarter. But that was mainly because the changes in assets are live greatly leverage, as our loan yield remained pretty stable between quarters. Looking ahead. Okay. As we have 85% of the loans that are off loading, should work well, in a rate rising environment. One good news to us is that in assets quantity side, aside from the $9.2 million resolution, and the $23 million payoff that I mentioned in our press release. We're on our way to advance another loan of over $4 million from the NPL level to the OIU level that can be sold shortly after. And also, we're looking to resolve another $4 million of loans which will be paid in for as we can see right now. So by the end of first quarter, I hope our loan quality would be even better than the fourth quarter. For year 2022. Obviously, we still have challenges in Omicron. It's hard to predict when the pandemic will be easing up on us. And also, with the challenge of a high inflation economy, which I guess is taking time to quiet down. But we're confident that our country will eventually dealing with these issues effectively. But our job is to get ourselves as well prepared as possible, and then be alert every step along the way. So I thank you very much, I'm ready for your questions.

Thank you. At this time, we'll begin the question-and-answer session. [Operator instructions] At this time, we will pause momentarily, to sum up the roster. And the first question comes from Matthew Clark with Piper Sandler.

Hey, good morning.

Good morning, Mr. Clark.

Maybe just starting on expenses. Nice decline in comp expense this quarter. But you also had some cautious commentary in the release around inflation, more specifically wage inflation, I would think. What's your thought there on the run rate, Ed and just overall expense growth for the year?

Yes. So fourth quarter was good in terms of expense control, Matthew. We would expect going forward, as you know, first quarter is always a little bit of a headwind for us on the non-interest expense side due to the payout of incentive compensation. But comparing linked quarters from Q3 to Q4 incentive compensation, expense was lower in Q4. And then the capitalized loan costs were higher in Q4. And as you know, that's a credit to salary expense because we credit capitalized the loan costs and amortize them over the life of the loan. In terms of first quarter run rates, my guess, Matthew, would be anywhere between 15/2 and 15/5.

Okay. And do you think it trails off? Like it's done historically through the balance of the year?

That remains to be seen. The big wildcard there, Matthew, is you already touched on it is on the compensation side specifically for us recruiting. We're successful in recruiting in the first couple of quarters of the year, you likely will not see that trail off. However, if not, you probably will see it trail off a little bit. Fortunately, we're not terribly subject to inflationary pressures as it relates to non-interest expense, with the exception of salaries and a few other items.

Got it. Okay. And then, just on the loan pipeline, I think Mr. Yu, you said its quick decent. When you think about it or when you look at the pipeline, you think about the year ahead, is that still enough to get you to high single-digits to low double-digits or should we think about something from that?

That first base, and I'm on to it, okay.

Hi, Matt. This is Wellington. I think the pipeline is decent to robust, I believe, especially with -- as we continue to have a strategic target to hire a new relationship manager and looking at the pattern from last year. Hope our new region and the new hire that we brought in, I think that hat have worked out very well. The big wildcard, as Mr. Yu mentioned, is the runoff. So we just have to run faster than the runoff, and then we'll -- that's the wildcard.

Matt, as I said, one thing I'm relying upon is our staff's capability. We did originate $1.7 billion of total new [Indiscernible] in 2021, which is a very high number considering our total loan size. None of us have a crystal ball saying how much will be. And I just feel that, the economy is getting better and we should be -- hopefully we should be doing better.

Great. And then just on the margin outlook, the remix, knowing the loan growth was weighted toward the end of the quarter. Would it be fair to assume that remix benefiting the margin in the upcoming quarter, and then can you give us some more color behind the loan pricing that's held up pretty well here and the source of the commercial real estate growth, the types of properties you guys are being able to finance of late?

I will give you the loan pricing information and our Ted Ed is giving you the movement of the margin situation. No, actually that -- hello?

We got some background.

Hello?

Go ahead.

The loans for the whole year, the new loan are made at anywhere from 50 basis points to 100 basis points, less than the loan that being paid off. And it is higher in the beginning of the year and close by to the year, it's narrowed down to about roughly 50 basis points. And I have reason to believe the first quarter if there's payoff, the differences will be more narrowed further. And this is a national trend and this trend interest rate environment, this trend of competition in this [Indiscernible] all banking. If you have a portfolio loan, you do nothing about it, you would continuously go down because payoff is whatever it takes. So what we try to do is, generate enough new loans. Okay. To hopefully -- to bring up the total net interest income to the level that is with fee -- is reasonable for our shareholders. So you're going to add.

Yeah, in terms of the margin, we ended the year the last quarter at 328, and as we talked about, a lot of that is due to the deleveraging effect during the quarter with the preponderance of the loan growth occurring in the latter part of the quarter, and the deposit growth going on throughout the quarter deleveraged the balance sheet. So that led to the -- another decline in the margin. So that said going forward, we would expect with a higher earning asset base -- certainly, we expect net interest income to grow and that's what we really focus on. In terms of the margin, or mathematical output, I would say it's going to be probably flat to just slightly expanding a little bit in Q1.

Great. Thank you.

Thank you.

Thank you. And the next question comes from Andrew Terrell with Stephens.

Hey, good morning.

Hi, Andrew.

And I appreciate the guide on expenses. It's really helpful. Maybe just thinking about it more holistically if expenses normalize a bit higher to start the year and maybe stay there throughout the year. We also have an improving rate backdrop and they're clearly very asset sensitive. Just taking kind of those pieces together. Is there any reason we shouldn't, I guess we shouldn't think that you can manage the efficiency ratio kind of add or below that 30% level, kind of like we saw this quarter?

Well, yeah. 28/8 surpassed our -- even our own expectations, Andrew, but I don't see any reason why we can't keep that a low 30s. That shouldn't be a problem at all.

And I just -- I have to add on this. You see, efficiency ratio is a function of net interest income. And when the ma -- when the rates -- if it is rewriting environment, the net interest income is likely to increase. With expenses less -- actually, that's a less of a movement than the interest incomes or likely that we can maintain that efficiency ratio.

Okay, thanks. And yeah, clearly impressive at, 28 [Indiscernible]. Could you guys maybe provide us an update on how progress is going for the Houston, Texas LPO?

Okay. You want to update Houston?

Houston update. We have in terms of our headcounts right now, we have 3 individuals and we're looking to hire 3 more coming on-board towards the end of this month. So I think with that in mind, we always -- again, our mentality is always looking for a productive relationship manager where we consider variable cost that can bring in business. So is going the right direction, Houston under the leadership of a veteran. So we feel quite optimistic.

Andrew, I also want to add on a little bit in some more strategic point of view. From the view of a Board of Directors, Houston is a diversification. It is a very small percentage of our total production staff in small loan portfolio. And also, we have always been careful when we're going to a new market, we don't want to express explosive growth. For whatever reason it is, one of the reasons for our Chief Credit Officer, that you don't want to have explosive growth in the new market. So we would be pulled actively growing the Houston office because that's a good market. And too bad is that this pandemic changed our capability of visiting the office, support the office. So just keep growing there's still according to our plan, pretty much along with our plan.

Andrew, just to add onto that, they finished the year ahead of our expectations and that's a very inexpensive piece of real estate to operate as well. So we feel good about it.

Right. Okay. I appreciate it, that's it for me. Thank you for taking my questions and congrats on a good quarter.

Thank you.

Thank you. And the next question comes from Gary Tenner with D. A. Davidson.

Thanks. Good morning. I had a follow-up on the expense guide, Ed, for the first quarter of 15-2 and 15-5. If we look at it kind of year-over-year, that's in line, if not below what the first quarter of 2021 look like. I'm just wondering as you think about the commentary on wage inflation and everything. We're hearing in the economy in general here, why that would be the case and I am just wondering, is it related to the capitalized cost of benefit of having increased production potentially this quarter, versus where it was first-quarter '21 or something else?

That's part of it, Gary. The other thing we did is we accrued some of the payroll taxes that are going to be coming due in February when we pay out the annual incentive compensation. Our payroll tax expense does go up, so we did accrue some of that in the year 2021. So that's why you won't see that quite as high. In addition to that -- in addition to that, FDIC premiums actually come down for the bank as our risk profile has improved relative to a non-performing asset.

Also First Crowd are only the bank where raises to our staffs, beginning -- would be beginning on March the 1st. It's not immediately that creating a big impact.

Okay. That's helpful. And then, the second question I had just on the fee side, third quarter, you had a really significant with stronger quarter on labor credit fees. I think you talked about fourth quarter being lower, but it was below where it was even the first half of the year so. In terms of, as we're looking out to 2022 knowing that there's going to be some volatility probably in that line item, how are you thinking about that line of business today versus maybe how are you thinking about it when we talked in October?

Anybody wants to answer that? Wellington you want to answer that?

Yes, Gary. On the letter of credit fee side, I think we should view similar or probably will be greater than what we did in 2021. In fact, I think we have the officer who all ready connected with their source. So that's something that well, we would do and on the other types of servers, deposit service and that's something that we believe in our forecast that it'll be, it'll surpass at 2021.

In addition, Gary. Thanks, Wellington. In addition, service charges on deposits continually increases and that doesn't get a lot of notice because it's not a big line item, but year-over-year service charges increased 30 and that's due to a number of programs that we began internally in order to take advantage of the larger DDA base that we have.

All right. Thank you.

Thank you. The next question comes from Steve Moss with B. Riley Securities.

Good morning.

Good morning.

Maybe just starting with, circling back to loan yields here. There's relatively stable quarter-over-quarter. Mr. Yu, I heard you talk about pricing coming down. Just curious whether just any unusual fees or extra fees in the loan yield this quarter?

No. As a matter of fact, I think we actually had a small reversal of interest income of about $60,000 on a couple of loans. So there's been nothing unusual in the interest income on loans and as a matter of fact, to take that a step further Steve, looking at loan yields over the past 5 quarters -- over the past 4 quarters, our average loan yield is only down 12 basis points against this backdrop

Okay. The previous obvious strong passive growth -- okay. I mean, it's twice amount of the loan growth and also the pattern of the passive loan and loan growth changes out, I mean, net interest margin quarter-by-quarter. But again, that -- as I've said, that the --we will spend much more time and absolutely in net interest income, okay.

Right. Okay. And maybe just sticking with the inputs to the margin, just kind of curious, we've had a move up in rates here. What is your appetite for any additional securities purchases, if at all, given you're a billion-plus in cash?

Let me add the start to the mentioned to me that we should buy a couple of more securities.

I did not.

You did.

We did actually Gary, we did add, as you can see in Q4, we did add to the bond portfolio about a $190 million. And that's Ginnie Mae monthly floaters stuff. So it's very short in terms of duration. But from here on, I was looking at the average balance sheet since March, we've added $500 million in cash on the balance sheet just in the last 9 months. And so I think at this point we'd probably be pretty reluctant to put any decent part of that to work. We really look for the IOER rate to be increased as Fed fund rates go up. And then that's going to certainly help.

Right. And maybe just on that.

Okay. Go ahead.

Okay. And maybe just on that point on rates here, I think if I recall correctly, it's 50 basis points. The floors are about 50 basis points in the money. I'm just curious what percent -- rewriting, just what percentage of loans have in the money for us.

Let me go through this for you, Gary. As of right now, floating rate represents about 86% of the book, of the floating rate, about 84% have a floor. When we're looking at the first rate increase, we're going to look at -- we're looking at about $800 million -- a little over $800 million of the loan portfolio and moving up in the first rate increase. And then as we go to 50, 75, it gets greater.

Well, running pull-forward is one thing and I want to add on because the one building has 50,000 -- $50 million of cash on hand, and that will go move about our together. And is part of the securities are $250 million is also move along with the rate changes. So I calculated we have about $2.45 million in assets together with the Phase first-fit $0.25 sensitive of loans. Where $2.45 assets would go up if rate changes. And also our immediate sensitive liability is $2.06 million of money market and the interest-bearing DDA. And the remaining thing is TCD is $1.9 billion which will raise rates 1/12 every month. Actually, we have 18 months maturity schedule. So you're basically gradually increasing on the whole situation. So I am personally hoping with some luck and some management. Actually, when the rate first move, we should be doing a little bit better. And along the way was further increases.

Okay.

[Indiscernible] And then in --

I'm sorry.

Did that answer your question?

Yes. That's very helpful. And then maybe just one last question for me. Going back to the loan pipeline, just curious, what is the mix of business you guys are seeing in the pipeline coming up.

Okay. Either one of you want to answer that?

Well, I think the business right now I will say above 70%, 30%. 70%, CRE related and 30% on the CNI side. Johnny anything? That's about right.

Yeah.

After CIE includes mortgage.

Mortgage.

Mortgage was a small percentage increase. So that has always been along our business line. We always keep somewhere around between 28% to 31% in the last few years in C&I loans.

Right. All right. Well, good quarter and thank you very much.

Thank you.

Thank you. And the next question comes from David Feaster with Raymond James.

Hey, this is Eric Specter on behalf of David Feaster. Congrats on a great quarter. It's really great --

Thank you.

-- To see the quality improvement and the further improvement early in 2022. Just curious, how you think about reserves and the provision going forward, and what you would expect it to decrease back to that 1.24 for level. And which is the post day 1 CECL level. So if you can just give a quick update on that, that'd be great?

First of all, we're going to give you official answer of the reserve which is from Nick, that he has to be answering to the CPAs and so on the reserve level situation.

Sure. As Mr. Yu mentioned earlier, that our asset quality is heading to really positive aside, starting out from 2022, and by the end of this quarter, I believe our -- both our classify and also special mentioned loans will be dropped substantially. However, there's still a lot of since that we're watching at this time, probably the most is supply chain disruptions, and also high inflation as Mr. Li mentioned, that fab or try to increase rate several times this year and also probably there's some asset bubble during the past years because of the low cap rate, and everybody chasing the property. However, even though our key underwriting on those things actually is based on this year instead of the value, this asset bubble, maybe I'd give a good cushion for our existing loans. For new loans, we are closely watching that too. And apparently, Omicron, pandemic issues, labor shortage, all these kind of things will give us some pressure to economy growth. So no matter what, our portfolio is getting better and better and I believe once these issues go away then our normal range is around 1.2%, plus or minus. Then I guess what you're asking me is that right now we're at 1.37% and they have to see so it's 1.15%. What do we think about the differences? Obviously from operators’ point of view, I hope we can get back to the 1.15% level. But right now, Steve, there are a whole lot of qualitative factors that we are not releasing and we think the economy is not necessarily out of the woods yet. So we will evaluate every quarter along the way. And I hope that someday, if we can maintain very, very clean credit quality, we might may even go below 1.15%, but we just have to go every step the way. I'm I right when I say that?

Yes. Yes. Very true.

Would I be getting trouble with our CEO?

You're good. A – Li Yu: All right.

Great. Thank you. And then just want to do a quick follow-up on loan demand across your footprint and where you're seeing opportunities and the potential for did novo expansion opportunities as well. And just hear where you're most interested.

Okay. Either one of you want to discuss the opportunities?

While I think the opportunity is, we always go, I mean, in terms of de novo, we never expand into a territory for the sake of geographic location, we look at the talents that we have. For example, Houston, we went into that market because we we're able to recruit group of experienced banker and going today area. So that's are where the opportunity is, and Johnny fuel future chime in in terms of our recruiting new hires strategy and then all of that.

Yeah. In terms of your question, Eric, on the demand, I think demand is pretty consistent all of our geographic footprint. And what's Houston, New York, Northern and Southern California. But like what we always look for opportunities for expansions but we have to find the right team and the right people. That's always been our philosophy.

Great. Thank you. One more. If you don't mind, I'm just curious about your thoughts on capital deployment opportunities. Obviously, organic growth remains paramount, but I'm just curious, your appetite for buybacks or dividend growth?

Well, I should talk about buyback. [Indiscernible] to something, I have to ask all you analysts. And we were always told buyback is something rewarding our shareholders. Well, then after we buy it back, our networks become less. And the share code -- many of you valuing our stock based on the book values. In buying back, is that really rewarding our remaining shareholders? I'm keeping asking the question. We did the buyback. I guess your buyback will to the market and fully change to PE-based, the price, when we PE-based bit. So yes, we will continue to do that once we have excess capital today, and when we anticipate -- when we see the growth is not required in this capital we will use it for, where shareholder return to shareholder. As you can see, we are increasing our dividends continuously.

Great. Thank you. Congrats again on a great quarter.

Thank you.

Thank you. And this concludes the question-and-answer session. And I would like to turn the call over to Li Yu, Chairman and CEO, for closing comments.

Well, thank you very much. And that's -- considered that we're still in the middle of the pandemic. And consider that what the country has gone through at the last two years. We are fortunate to be able to have the operating results as we have just discussed today. And now if you base on whatever the Fed is saying, or Mr. Jamie Diamond is saying, that wind in the rate rising environment that which is more of a beneficial to a rate sensitive bank, like we are. But we will be careful every step of the way in the near future. Thank you so much.

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