Preferred Bank (PFBC) 2021 Q1 法說會逐字稿

Good afternoon, and welcome to the Preferred Bank First Quarter 2021 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Jeff Haas of Financial Profiles. Please go ahead.

Thank you, Betsy. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the first quarter ended March 31, 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'd like to turn the call over to Mr. Li Yu. Please go ahead.

Thank you. Good morning. Preferred Bank's first quarter income was a bank record of $21.2 million or $1.40 per share -- $1.42 per share, okay, compared to prior quarter quite favorably because this quarter, we have only 90 days as compared to fourth quarter of 92 days. In addition, in this quarter, we have a quarterly specific payroll taxes on bonus distribution, okay? Okay.

This quarter features strong deposit growth, on an annualized basis is 25% plus, okay? We are thrilled to have these additional deposits because it gave us more opportunity to grow and to do many things. But we've also noticed the excess cash flow has been moderately compressing our capital ratio, return on assets, net interest income and net interest margin.

First quarter loan growth was $104 million or 10.4% on an annualized basis. We have noticed through our various contact with our customers, and generally, they are more optimistic about the future of our economy. And now they are planning or already taking action to commit to more business expansion transaction or investment transactions, okay? Some of them even went as far as fearing about the potential inflation and then wants to commit their resources to assets at this point of time.

To meet this increased demand, we have, one, added a team of 4 relationship officers and total team of 6 in Houston, Texas. In California, we have so far added 5 relationship officer, and we'll continue to look for new talents throughout the year. We're working on areas in New York and other places for new relationship officers.

Internally, we are convinced that the next set interesting move will be going up rather than coming down, okay? So with that, we are actively and we have been -- always been preparing ourselves to have our balance sheet become very asset-sensitive, okay?

As of March 31, credit metrics seem stable. The total deferred COVID-19 loans -- related loans was down to $25.8 million, which is quite moderate, okay? Operating expense was slightly higher, but considering the quarter-specific payroll taxes, it is not much different as compared to previous quarters, okay? And as you are well aware of, our business model is that we have one-on-one high-touch service relationship with our customers, and we're eagerly waiting for the economy to open up so we can reach out to our customer more actively.

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

(Operator Instructions) Our first question comes from Matthew Clark from Piper Jaffray.

Could you just first start on the margin and the contribution from PPP? I don't know -- I don't think it's that material, but I was trying to hone in on the core margin, excluding PPP, if you had the contribution in net interest income this quarter.

Now that's best answered by Ed, okay?

Yes. I would say, Matthew, due to the fact that PPP totals about 95 -- $94 million, the rate, including fees, was about 2% in the most recent months. So it's pretty negligible against the $4 billion portfolio. So I would say probably maybe a basis point on the margin.

Okay. No worries. It's fine. Okay. And then on the outlook for the margin, you guys put up some pretty good growth. And maybe you can speak to the rate on new originations. And I know you have a lot of floors on your existing portfolio, but given the growth, would -- is it fair to assume that we should see some incremental pressure on the margin just from the new business?

Okay. Matt, margin prediction has become a situation that we watch our time. For instance, just to be statistically mentioning, for the first quarter, we have -- a payoff rate is 90 basis points higher than the rate of new loans being done, okay? This has widened up from previous quarter of $0.32, okay, 32 basis points, okay? And it is a growing trend when you have a low interest rate environment. For a long extended period of time, people sort of kind of -- I mean, pricing their loans lower on the competition side.

And also that you mentioned that we have nearly a large portion of our loans had -- has a floor, yes. And many of the floor was made -- about 2, 3 years ago was quite high, and all the customers coming back and renegotiating on those floors. And in many cases, we have to agree to the changes, so on. So these 2 factors going forward is that we'll have additional negative pressure to the margin, NIM, okay, not net interest income.

But what the positive force is continuous reducing of the interest cost. Plus the potential interest cost reduction, we refinance of the sub-debt and also our growth, okay? So -- okay. So if we had strong growth, it will balance out some of the margin compression situation. Okay.

Yes, that's great. Yes, NII...

(inaudible)

Yes. NII is clearly the focus. And then just on the C&I growth this quarter, also very strong. Could you just give us a sense for where that came from maybe by industry type or business type this quarter?

Okay. You want to mention that, and I have some statistic. You want to mention that? You want to discuss this?

Yes. Sure. Matt, this is Wellington. Again, as Mr. Yu mentioned that our clients are bullish. They're very uppy, and they see opportunity. Some existing client relationship is their business expansion and also taking over some new relationship that adds to the base of our industry, okay? We have, for example, the produce packaging, health care professional, data center, communication. These are some of the example, also like the building material, like high (inaudible), et cetera.

Just to also tell you, the new clients represents most of the growth, but there are about additional usage or increased usage by our existing client in the neighborhood of $40 million.

Okay. That's helpful. And then just on the noninterest expense side of things, maybe for Ed. In terms of the run rate, it sounds like you guys have hired some additional relationship officers that probably put a little bit of upward pressure on that comp line. I guess, how should we think about the overall run rate and the potential for additional hires for the rest of the year?

So yes, we don't have the Houston LPO, for instance, personnel. That's not a fully baked quarter in there. That's about half the quarter. So in addition to that, the payroll tax expense was fairly high in Q1 as it is every year because we pay our incentive compensation every February of every year. So that's a bump of about $500,000 to $600,000 on the run rate. So I would say going forward, we were [15.65] in this quarter. I'd say going forward, we'll be right around -- probably right around [15] would be my guess.

Okay. Great. And then maybe just lastly on the loans that were sold. Can you just give us some color there in terms of what exactly was the amount that was sold and the property type and situation in general?

Okay. We have -- 1 SNC loan was downgraded substandard, okay? And we don't want to keep this loan in our portfolio because it's been substandard, okay? So we sold it.

Our next question comes from Gary Tenner from D.A. Davidson.

Was something -- just to get a little bit of color in terms of your comments about working to be more asset-sensitive. I mean, you talked about floors a little bit, but would love to get an update on, today, the amount of your portfolio that's floating, how much of the portfolio is subject to floors and how in the money the floors are. But any commentary on what you're doing to become more asset-sensitive as you noted in the press release would be appreciated.

Ed, you have it handy. Just read it.

Yes. So Gary, of the total book -- and again, this is as of year-end. I apologize. We didn't quite get it updated in time for 3/31 because it requires a lot of data work. But of the total book, 82% floating rate, 18% either fixed rate or tied to CDs and secured by CDs. Of the floating rate, over 99% have floors, okay?

In terms of where we move going upward, Gary, and I think that's probably where you're headed in terms of interest rate increases, the first 25 basis points only moves about $50 million of the portfolio. The next $50 million moves another $42 million. The next 25 basis points moves another $12 million. And then after we get to 75 basis points, we really start to see a majority of the portfolio start to reprice. So you can assume that roughly -- we're roughly 50 to 75 basis points in, in terms of upside down on the floors.

Yes. That's great. I appreciate the color. And then in terms of loan growth for the year, obviously, you talked about the new hires, good quarter, ex-PPP this quarter. Expectations for growth for the remainder of the year based on kind of pipeline and what you're seeing here from customers right now?

Well, here is a situation that -- I have always been saying that our crystal ball is kind of not that clear, okay? So I'd like to think that the sentiment among all our staff is that business is increasing. People is more active. But to quantify this kind of percentage is difficult. And as you know, that, historically, we have always been having a reasonable organic growth, and obviously, that we dedicated ourselves to continue at least the historical level. But again, it's a lot variable economy, when it's open, how -- what time it become -- the pickup speed and those other things, okay? So I really cannot answer -- quantify it, but I'd just say that we feel that the growth will continue in the next few quarters.

Okay. And just with regard to the Houston LPO and the hires there, what's the focus in terms of lending there? Is it C&I? Is it commercial real estate? What's the target?

Yes. Okay. Outside of California, we are -- obviously that we started off with C&I. And gradually, as we rooted into the community, that more than the -- we're gradually getting more C&I. In the California new hires, the 2 new loan officers are -- or 5 new loan officers, 4 of them is C&I.

Okay. So Houston initially will be more commercial real estate-focused. That makes sense.

Yes. Yes.

Our next question comes from David Feaster from Raymond James.

I'd just like to get an update on the Houston LPO. That's pretty exciting. Just curious to hear maybe how the contribution was in the quarter, how the pipeline is trending, and just, I guess, kind of the early read on that.

Well, you want me to answer that?

Well, we can both answer that. I think that our pipeline, our initial first pipeline meeting, about a couple of weeks ago. They had -- they presented over, I would say, 10 real doable deals. So now it's just a matter of getting their back-office people in place and start putting the deals together. And just after this meeting, we have weekly pipeline meeting with them. And so it looks like, so far, the officer that we have there, they know the market, they have customer base and seems like a customer all portable. Mr. Yu?

Okay. David, number-wise speaking, there's no contribution from Houston in the first quarter, okay? And as of today, we have not booked any loan yet, but a couple of them are ready to be closed.

Okay. Okay. That's encouraging. The growth is going to clearly be there. But just maybe more broadly, just given some of the recent consolidation and disruption in Texas and across the country, does that create an opportunity for maybe some more of these de novo-type expansions? And what markets are kind of at the top of your priority?

Well, you know that we are people-specific type of expansion. In other words, we always find the banker and the team, then we go to the area where he or his/hers expertise, I mean, is in those area -- have a relationship in the area. So we are not sure which area that will come out first. We're working on several areas right now, okay? So we are not sure which one will be -- end up the first, okay -- I mean, available talents that can be higher. But there are about 3 or 4 regions we are currently looking at, okay? And other regions will be -- just maybe by the good grace of God, will fall on our laps.

Yes. Okay. And then maybe just following up on your commentary on new loan yields. How are new loan yields trending? You talked about the 90 basis point spread. Was that more of a function of mix or continued pressure on pricing? And has the steepening of the curve at all allowed you guys to maybe have better pricing in your conversations?

I have to qualify my answer, that I just got the information a couple of days ago, and I have not dived enough into that. But my first reading of the situation is that this quarter, the mix is one of the issue, okay? And it shouldn't be as big as 90 basis points because last quarter was 32 basis points and with the so-called day in, day out, I mean, all the deals coming in, okay? So it should be less than 90 basis points, but we cannot really quantify that much yet. But the trend is -- it probably will continue to compress a bit in terms of yield is closer just because (inaudible) competition, okay? And people are pricing their loans on a 10-year fixed rate below our net interest margin, okay? So unless there's 1 or 2 very specific cases that we will get them for because other reasons, there is -- we cannot compete with that.

Yes. Where do you see the most competition? Do you find it from the larger banks? Or is it the smaller community banks that are being the most competitive?

Larger banks.

Our next question comes from Tim Coffey from Janney.

Mr. Yu, if I were to ask you about kind of commentary on the deposit growth in the quarter, would it be any different than what Wellington was describing in terms of the loan growth that you saw more activity by clients as well as introduction of new clients to the bank?

Well, deposits inflow, actually, most of them coming from our existing clients. We have not taken any new clients in the quarter that represent a huge deposit basis, okay? And it can't be more than 1 or 2, okay? But it come basically from our existing customers, okay? So it grow, that means, generally, we feel our customer base financial condition is getting better, okay? So this is what we observed.

Okay. With the tax filing date being pushed back, do you anticipate any kind of outflow in deposits that's well above the seasonal type that you would see in 2Q?

Well, I hope -- it is my selfish hope that the deposits -- we will lose a couple of hundred million dollar deposit during the tax state, okay, because that will improve our net interest income. Okay.

Yes. No, no, that would definitely help.

They're likely to be reducing a bit in (inaudible).

Okay. And then, Ed, as we look at kind of the time deposits maturing this next quarter, do you have any idea like what -- can you show what the volume might be and what the price differential could be?

I do. I can. Tim, it's -- just under $500 million will be maturing over the second quarter at an average rate of 95 basis points, to be replaced somewhere around 50 basis points. We actually have just recently lowered again our offered CD rates. So that's the beta for the quarter.

Okay. Great. And then, Mr. Yu, the Houston LPO, I mean, obviously, you've got a really experienced team leader out there. And the goal that you set about loan originations of $150 million by the middle of next year, are you getting a sense that you could do better than that? Or is it too early?

Well, so far, this is a goal that our Houston leader has set for us, okay? So obviously, that -- we have the psychology of our staff to be worried about it because if you set too high to push a goal, people will get negative reaction out of that. But obviously, we do everything, okay? If they can produce $500 million during the first year, we in Los Angeles can be sitting with the hands on the -- sitting on our hands. So -- but judging from the prior experience we have to starting with a new office, we think that is close to reasonable, and we hope it's going to be better.

Our next question comes from Andrew Terrell from Stephens.

So credit trends looked pretty positive this quarter, and it was nice to see the negative charge-off number. Can you just remind us kind of what the outlook is for the loan loss reserve moving forward as we go throughout this year?

Well, let me just -- first of all, it's a CECL calculation, okay? So I want to say something first, and then can Nick, our expert in CECL, I mean, to talk about that. And first of all, let me recall your memory, okay? In 2020, we provided loan loss provision of $26 million. We had a charge-off of $5.4 million. So the $21 million must have 1 to 2 areas: one is a general macroeconomic situation; the second of all is what we call reserve for proactive downgrades, okay? And we like to think some of them is quite proactive, okay? Now with -- after we make those provisions, I mean, these credit did not deteriorate. So somewhere along in the future periods, it will be upgraded, okay, together with the general improvement in the macro situation.

So it is conceivable that we may have some releases in next year -- in the industry later this year, mid this year. We just don't know because it depends on the calculation. But I want to tell you personally, I am very happy that we don't have to use up that received in the first quarter. It's kind of nice to retain the availability. So Nick, do you want anything to add?

Tim, just like Mr. Yu mentioned, that for this year's projection, I believe it's not as last year. And -- because the quality of our loan portfolio is quite stable at this time in terms of declining in the volume of deferment requests and the volume of downgrade changes and nonperforming asset as well as past few -- 30 days loans are quite limited. So for this year, we believe that it's supposed not to be like last year. We tried to make -- just like Mr. Yu mentioned, we will make a reserve to prepare ourselves during the pandemic time. So this year or next year, probably we don't need that much of a reserve, and we'll be -- have some reversion. That's our prediction at this time.

Okay. That's extremely helpful color. I appreciate it. Just thinking about some of the liquidity on the balance sheet, obviously, a lot of liquidity and you guys are not alone, and then maybe kind of deposit flows can sway this near term. But can you just remind us over the longer term where you like to manage the cash balances just as a percentage of total earning assets?

Okay. It's a two-edged sword in this situation. There are times we're fighting for deposits like very easy, okay, and -- because of the loan growth and generally the tighter deposit market. And this happened to be the countries are flushed with cash. And I was reading the other reports, other banks, it all seems to be -- everybody is flushed with cash, okay? But as a operator, I can -- only speaking of the operator and not a financial engineer, okay?

As a operator, deposit is just like capable staff. You need to get it when you see it. And even though it's a short-term negative, but long term, it's productive. What we just hope to see is we get deposit gradually reducing our cost, and we slowly grow into it. And we'll (inaudible) the differences and so forth a negative number and not -- I mean -- because once we turn away certain deposits, turn away certain relationship, will they come back when we needed them? So as a operator, our consideration is slightly different.

(Operator Instructions) Our next question comes from Steve Moss with B. Riley Securities.

Just 1 question here. Most of my questions have been asked and answered. In terms of just the other half of the deposit base here, your interest-bearing savings and checking deposits are basically stable quarter-over-quarter in terms of costs. Just wondering if those were repriced lower here with CDs.

The majority of the repricing within that category, Steve, took place within 2020 when rates were coming down quite precipitously. So there's not been any repricing in the money market or now or savings account categories.

Going forward, the repricing is -- if anything, is very moderate because we're already coming close to the low of our peer group.

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

Thank you very much. I hope we are really in the last leg of this pandemic. So I pray that everyone stays safe, and we'll get back in which I hope is a new boom cycle for our economy. Thank you very much.

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