Q1 2024 Preferred Bank Earnings Call

Participants

Jeff Haas; Investor Relations; Preferred Bank

Yu Li; Chairman of the Board, Chief Executive Officer; Preferred Bank

Edward Czajka; Executive Vice President and Chief Financial Officer; Preferred Bank

Wellington Chen; President and Chief Operating Officer; Preferred Bank

Matthew Clark; Analyst; Piper Sandler Companies

Andrew Terrell; Analyst; Stephens Inc.

David Feaster; Analyst; Raymond James

Presentation

Operator

Good day and welcome to the Preferred Bank first-quarter 2024 earnings call. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Jeff Haas of financial profile. Please go ahead.

Jeff 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 take-up, 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. 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.

Yu Li

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 shares. This quarter, our loan growth was annualized at 4% and deposit growth was 6.5% annuitized this quarter, our net interest margin is four point plus 19% and which is a slight decrease from previous quarter.
Looking ahead, the second quarter will likely were also compressed, but we don't think it's going to be very significant. It's going to be a minor compression. The reason for the compression in the first quarter is continued increase in costs deposits as of March 31, total criticized loans is $87.6 million, which is $3.6 million higher than the $83 million at year end. I know there's a massive mistake somewhere, but up to you have to round out three numbers.
And the nonperforming loans has reduced from $28.7 million at year end to $18.2 million in first quarter end. This quarter, we have a charge of $3.5 million related to loans that previously identified was lost count and fully reserved. For this quarter, our provision is $4.4 million. The reserve our allowance now stands at 4.1 points 0.49%.
On the business side, we have just opened a new branch in in Orange County, Irvine area. This is a full service full service brands staffed with a team of deposit personnels and a team on personnel. We also practically, as of right now, this minute open up a suddenly there are loan production office in the Silicon Valley area, and we plan to continue to add relations field personnel in the remainder of the years. Since Q3 last year, we have been tried to reduce the sensitivity, our loan portfolio as of today with BBVA is in 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 adjustments to control our interest rates risks even better.
Thank you very much and I'm ready for your questions.

Question and Answer Session

Operator

We will now begin the question and answer session to ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. First question comes from Matthew Clark with Piper Sandler. Please go ahead.

Matthew Clark

Yes, good morning, Evan. And maybe just to start on the NIM. I'm trying to get some visibility into 2Q. If you had the average name in the month of March and the spot rate on deposits at the end of March.

Edward Czajka

We are ready for you, Matthew, the NIM. for market has fallen spot rate on deposits was four oh four.

Matthew Clark

Okay. And therefore, of course, at the end of the month or the was it the average of March?

Edward Czajka

That's the average for the month, yes.

Matthew Clark

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

Yu Li

Well, first of all, the I don't think we have it too many people in the fourth quarter, most of them in the first quarter.
Okay. You know, when you add the relationship officers usually takes about 1.5 to 2 quarters before they can materialize into a material delta portfolio start to materialize. And also, as you probably know in our business that for every 10 people you hire your home, everyone works, but not necessarily the case, but we just hope hopefully that women some stars that the balance of the whole situation with a pop with the pipeline.
And the one thing I want to expand the pipeline first, both.

Wellington Chen

Thank you, Mr. Yu.
Our math, our pipeline is of branch pretty healthy.
I think that though we are no really SMC.
You mentioned that really focus on taking care of our existing customer and right now there, so quite a big opportunity for them and a national priority. So in turn, yes, that's what we our pipeline is pretty healthy.

Matthew Clark

Okay. And then the I'm sorry, the other question I had, I think was oh, yes.
Around on 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

Yes. So we have Q2 TCDs of about just under $1 billion. Our maturing there 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 Q. three. 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

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 well would like some color there.

Yu Li

Well, obviously, these things are coming in and out and has a different time and different stages of some of those those criticized loans will migrate into the nonperforming area. And we have obviously, it is our job to to identify them in the very early stage to provide the proper reserve on the whole situation.
Okay. So that the loss Quantum has been accounted for and will not be affecting the future?
Yes. Okay. So was your was your question, Nick, have anything to add now really just give you a little bit more color about those two loans related together, we sold the note at par plus a little bit small premium on that. So just like Michel mentioned a migration in and out for credit. So I believe we didn't notice any any significant trend of credit side?

Matthew Clark

Yes. Great.
Thank you.

Operator

The next question comes from Andrew Terrell with Stefan's. Please go ahead.

Andrew Terrell

Hey, good morning, John, and I have my first question was around just the loan yield expansion. You saw this quarter seven basis points sequentially, it was up pretty nice. I was just curious, was there any of them and kind of outsized interest recoveries or anything like that?
No 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

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 it's just a little above 200,000.

Yu Li

Yes, yes. I mean, I think it's half of each quarter. We I would hope that we have some proof in malignant MMX. motor, although still performing and we have not tried to sort out and understood. Got it.

Andrew Terrell

Yes, we'll have from our, um, on the I was looking to make a comment from the earnings release around the on the rate sensitivity position and kind of some adjustments of the loan portfolio to maybe dampen out that sensitivity. But I'm looking back at the annual report that you guys are disclosed down 7% to NI. with a negative 100 basis points in short-term rates. Has that moderated significantly as of the 30 31. Can you just speak a little more to how the balance sheet is tempered in terms of rate sensitivity?

Edward Czajka

Well, it it has tempered. I can't give you the number right now in 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 are coming up for renewal. If they're remaining floating rate, we're moving the floors up from where they were previously on all, I'll fix it with a secure our target for now.

Yu Li

I can give you a rough number right now. I cannot tell you the exactly Donald and UPCs Peninsula we haven't had a chance to do that. And I think previously we would disclose to you are as rate sensitive as loans is about an 87%, 87% like I can't quote you exactly that's about it. Now we're down to about the MS MS 70% today or maybe slightly lower than the 70 k. So if you compare to that. I live a lie, but I mean a liability sensitive, we're going to have a sensitive liability. We have, Jay, you know that way and political battles right now.

Andrew Terrell

Yes, okay. We added the mid 70s is yes, definitely a big move, and that's really helpful. I appreciate it from. Then maybe one on the expense base from 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

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, and they weren't in Orange County and the Clover 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.

Andrew Terrell

Okay. Very good.Thank you for taking the questions this morning. I appreciate it.

Yu Li

Thank you again.

Operator

If you have a question, please press star then one. Our next question comes from David Feaster with Raymond James.

David Feaster

Please go ahead and good morning. Everybody is focusing on We you touched on 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 of credit. I'm curious what are you seeing more broadly in the health of your clients? Where are you seeing any signs of stress?

Yu Li

And just any any thoughts on credit more broadly from your peers, but let me let me state that the fund was somewhat way back in our, let's say, in 2022 a little bit earlier when we start to go worry about the rates and credit and so on and inflation and so on. If I see I thought that the was this period almost two years gone by was the charge offs. We have and the loss current loss we have had and the level of NPLs and the level of criticized assets is as of today, I wouldn't be so happy those days. But as you know that one of the tricks in dealing with credit is tried to identify early and tried to fully reserve that.
Okay. So that's our basic principle. But talking about was our customer is concerned, most of our customer started to turn a little more positive. And I think basically obviously inflation is one factor that is down and another factor that rate is stabilized, although everybody would like to see it down a little bit. But all we all know from point how sooner or later is going to be lower. It's a matter of whether it's half a year or one year or whatever that sooner or later will be back from that. And from what I read from all the big banks reporting numbers does credit posture also better than expected internally expected what projects?
So generally speaking, I think the marketplace will start to see you see the light at the end of the tunnel in fact, many of our more opportunistic customers started to thinking about new interest.
Yes. Okay. I wonder if that's so what you have I mean, yes, any additional timing related to that.

David Feaster

That's That's great color. Does that does that mean 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. You know, it seems like you've strategically decelerated growth from the conversations that we've had. Does it sound my read between the lines that we maybe we could see a bit less cautious today, and we can see growth reaccelerate in the back half of the year.

Yu Li

But I don't want to be really associated gross win. This conscious Phase I finish here. Professionalism, put the 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're a person now that their production will come maybe three to six months later. So that's 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 sooner or later it will stabilize into a new normal situation, which would be reasonably lower than it is today. And although every pricing activities adjusted the new long new rate, every pricing, the new the inflation number of product and then the savings will start to further like normalize themselves. And with our current strength of the economy, I personally believe that business opportunity has increased and there would be less risk of doing transactions today as compared to one year ago.

David Feaster

That makes sense. Makes a lot of sense. Thank you for that color. And then last one for me. Maybe just following up on the branch expansion LPO, I love seeing the continued expansion and investments. I'm curious how you how do you think about de novo expansion priorities at this point. What other markets are interesting to you? Just kind of curious how you think about as you continue to expand what we're where you focus, David, the expansion really you have two different directions.

Yu Li

One is, is that the areas we think we have a lot of business scale we want to be. And then the situation is that when we have the personnel and the Preferred Bank to smaller institutions. So the almost we can go anywhere and get a reasonable amount of business with a new operation. And therefore, if we are finding the banker has the book of business. We tend to build a team around him and imaging center down was the operation there. Having said that, and the Silicon Valley is one of the areas that we have wanted to be there. And then we have never been able to get the right person there in the last 10 years. So our family situation calmed one until was able to locate the couple of people who do you think it would be accretive to our leaves us a lot. So we are starting that particular offering. It's a it's a right place for us and probably the people with the right people for now.
Okay.

David Feaster

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

Yu Li

We have always been letting our shareholders know that grows in a normal situation is our preference as it represents the best long-term value, but within the last three, four years, starting from the pandemic with the inflation and so on, why the bank is making over 20% return was the cost of alternatives of costs in Cephalon in the 5% range.
Okay. It does not seem a good idea that have their idle cash, which will have too much long. Nobody is much about those. It was idle cash being staying there, making 5% buyback own stock represents a pre-tax 33% to 33% return. So economics tells me that our shareholders would like to say that over the long term, if we do, that makes a lot.

David Feaster

Thanks, everybody.

Operator

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

Yu Li

Thank you very much. And as I said, that we're very happy with the quarter and hopefully that the Nina, I personally believe that a fine leasing started to get stabilized. And going forward, I hope it will 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.