Preferred Bank - Q2 2024
July 26, 2024
Transcript
Operator (participant)
Good afternoon, and welcome to the Preferred Bank second quarter 2024 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star and then 1. To withdraw your questions, you may press Star and 2. Please also note today's event is being recorded. This time, I'd like to turn the floor over to Jeff Haas of Financial Profiles. Please go ahead.
Jeff Haas (Director)
Thank you, Jamie. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the second quarter ended June 30, 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 (Chairman and CEO)
Thank you very much. First of all, I'd like to apologize to all of you for pulling you away from the opening ceremony. Thank you for attending the conference. I'm very pleased to report that Preferred Bank's second quarter net income was $33.6 million, or $2.48 a share. This quarter, we have an annualized 8% loan growth and an annualized 5% deposit growth. For the quarter, we have a $9 million charge-off. The charge-off are related to the loans that was previously fully reserved as of the previous quarter, and we had an increase in non-performing loans of $22 million. I have included some details in our press release for your information and for your review. We believe these NPAs are either fully reserved or are adequately protected by the collateral.
The resolution of these non-performing loans will not likely cause any significant impact to our future earnings. It's worthwhile to point out the root of the loan losses came from the pool of criticized loans. This actually has reduced $13 million from the previous quarter, and the migration pattern also seems to be improving. We have always been fairly consistent with our, the operating our non-interest expense and non-interest income. Going forward, I am not seeing any significant changes to these factors. And we have been working to reduce the asset sensitivity of our balance sheet. We believe we're not far away from what we see as the optimal level for us, and the much-anticipated and hoped-for interest rate relief will not likely causing significant effect to our future income statements. A year ago, the bank announced a buyback program of $150 million.
For the past 12 months, we have repurchased $72.5 million of our own common stock. The regulatory approval for the program has expired. We are now seeking for reapproval or extension for us to be able to repurchase the remaining $77.5 million.... I'm pleased to report with the $72.5 million repurchase, with the $2.80 a share dividend, and with the reasonable growth in loans and deposits, the bank's TCE ratio actually improved by 53 basis points, just as we have planned. We attribute this to the bank's earning capability. Thank you very much. I'm ready for your questions.
Operator (participant)
Ladies and gentlemen, at this time, if you would like to ask a question, you may press Star and then 1 using a touch-tone telephone. If you are using a speakerphone, we do ask that you please pick up the handset prior to pressing the keys. To withdraw your question, you may press Star and 2. Once again, that is Star and then 1 to join the question queue. At this time, we'll pause momentarily to assemble the roster. Our first question today comes from Matthew Clark from Piper Sandler. Please go ahead with your question.
Matthew Clark (Managing Director)
Hey, thanks. Good morning, everyone. Just one on the margin. We've got the adjustment for the interest income reversal, but if you have the spot rate on deposits at the end of June and the average NIM in the month of June, excluding that reversal?
Edward Czajka (EVP and CFO)
Yeah. Total, so the margin for June, 3.89%, Matthew, and total cost of deposits is 4.08%. It has been consistent for a few months now, so I think we've hit the apex there.
Matthew Clark (Managing Director)
Okay. So the 4.08 for the month of June in total. And the 3.89 includes that 11 basis point reversal?
Edward Czajka (EVP and CFO)
No, does not. That did not happen in June.
Matthew Clark (Managing Director)
Okay.
Edward Czajka (EVP and CFO)
That happened in May.
Matthew Clark (Managing Director)
Okay. Okay. Thank you. And then, your commentary about being, you know, reducing your asset sensitivity. Can you be a little more specific at this stage? You know, how much of your portfolio has floors? You know, where are they? And, and how would you view yourselves, with each 25 basis point rate cut?
Li Yu (Chairman and CEO)
We have a detailed floor analysis later on we can provide you with. But in general, I'd like to say that during the past 12 months, or maybe as much as 18 months, we have reduced our floating rate loans. Okay. Actually, we have the fixed rate loans, we have increased from 11% to right now approximately 25%. Okay, so the floating rate assets or floating rate loans has reduced likewise by about 14%. Okay. So, this is actually what we have done, and we look comparing to our balance sheets, sensitivity of our liabilities, okay, then you can see that we're, in general, pretty balanced position, you know?
Matthew Clark (Managing Director)
Okay, great. And then on expenses, maybe for you, Ed, it looked like there was a comp accrual reversal here in 2Q. Just can you quantify that and then give us a sense for the run rate going forward here in the second half?
Edward Czajka (EVP and CFO)
Well, in terms of non-interest expense, we came in a little light than I think what I had previously guided to. We had a decrease on the salary and benefits side, primarily due to payroll taxes on the bonuses, incentive compensation, which is paid out every Q1. So going forward, looking at it, I would still keep the same guidance between $20 and $20.5, Matthew.
Matthew Clark (Managing Director)
Okay. Thank you. Okay, I'll leave it there. Let others ask questions. Thanks.
Edward Czajka (EVP and CFO)
Thank you.
Operator (participant)
Our next question comes from Andrew Terrell from Stephens. Please go ahead with your question.
Andrew Terrell (Managing Director)
Hey, good morning, and thanks, Matt, for letting me slide in here. Can you talk about the $80 million hotel loan? I think you mentioned a 15% or 51% LTV. Can you just talk about when the last appraisal or valuation came in on this property?
Li Yu (Chairman and CEO)
I think the valuation is a little bit over a year ago when the hotel property is still undervalued, but value has actually improved. The reason that I want to say to you is that, you know, we are the unfortunate party that caught in the partnership fight. There's a money partner owns 99%, and the work partner owns 1%. And two of them, obviously, many deal together, they're starting to fight with each other, and the money partner really want to buy the 1% off. And obviously, that deal has not made, so both sides is taking their position. The non-accrual is a position that money partner takes, and therefore, we're fully expecting to redeem the property, okay, at the foreclosure date.
Andrew Terrell (Managing Director)
... Okay, understood. And then if I could just ask on the kind of asset sensitivity position, hear you on the kind of 75% floating, and that mix is obviously come down, so helps for future rate cuts. But the cash position, any interest in taking some of that and fixing it in the bond book? Just looking at the forward curve with several rate cuts in there right now.
Edward Czajka (EVP and CFO)
I don't expect we would do anything dramatic, Andrew. There may be a point where we want to put some money to work here, but I wouldn't expect a massive investment in anything. We do like keeping both sides of the balance sheet relatively short, so.
Andrew Terrell (Managing Director)
Yeah, makes sense. Any thoughts on kind of incremental? I mean, your loan growth was pretty solid in the quarter. What are you seeing from a borrower demand standpoint, and how should we think about loan growth in the back half of the year?
Li Yu (Chairman and CEO)
Andrew, can I take a little bit more time to answer that question for you now? First of all, you know, in the first quarter, okay, when the country fully believes the six cuts, okay? We see the loan demand actually goes up, even many people want to commit to new investments. These loans come to fruition in the second quarter. Usually, it takes a lag time, about three months to get loan deals done. In the second quarter, when the country believes that no more rate cuts will be only one rate cut, the demand is reduced. Okay, so we are seeing that possibly at the end of third quarter, the loan growth will be limited, okay?
Although we are working, we're cranking our engines up, you know, try to work hard to try to get more loans, but the demand is not as high as the first quarter. As we are now anticipating lower rate cuts again, we think that the end of fourth quarter, likely that will be more increased loan production.
Andrew Terrell (Managing Director)
Okay, so maybe a little bit slower near term, but to the extent that rate cuts start to come in, maybe improvement late in the year into 2025?
Li Yu (Chairman and CEO)
Yes, we do see that. As rate cuts is happening, we like to think we can getting closer to our historical growth rate.
Andrew Terrell (Managing Director)
Very good. Okay, thank you for taking the questions. I'll step back.
Li Yu (Chairman and CEO)
Thank you.
Operator (participant)
Our next question comes from Gary Tenner, from D.A. Davidson. Please go ahead with your question.
Gary Tenner (Managing Director and Senior Research Analyst)
Hey, good morning. Ed, hoping you could provide some of that data on the loan floors, say, you know, after 50 or 100 basis points of rate cuts.
Edward Czajka (EVP and CFO)
Sure. So, right now, Gary, about 21% of the floating rate loans. Well, first off, 98% of the floaters have floors, so put that out there. And then of that, 21% of that is within 100 basis points. The 79% is outside of 100 basis points of cuts. But that is, that is, that is moving, as you can imagine, and that, the 21% number continues to grow each month as loans are renewed.
Gary Tenner (Managing Director and Senior Research Analyst)
Got it. Thank you. And then I guess the natural other side of that question is, just updating maybe the third quarter and fourth quarter CD maturities and kind of where your renewal rate sits right now.
Edward Czajka (EVP and CFO)
Yeah. Q3, we have about, little under $1.2 billion maturing, and Q4, we have just, almost exactly $1 billion maturing. Those are at average rates right around 5% each, so we would expect some, some relief in the coming quarters as, rates have started to come down.
Gary Tenner (Managing Director and Senior Research Analyst)
Great. Thank you.
Operator (participant)
Our next question comes from Eric Spector, from Raymond James. Please go ahead with your question.
Eric Spector (Senior Equity Research Associate of Banks)
Hey, this is Eric, down in for David Feaster. Thanks for taking the questions. Just wanted to touch on the deposit side of the coin, and get a sense of trends in the quarter, especially how NIB core deposits trended later in the quarter into thr3ee Q. And just thoughts on core deposit growth. Do you think growth is going to come from existing clients or success on new client account growth? Any color there would be helpful.
Edward Czajka (EVP and CFO)
Okay, I'm sorry, you're gonna have to repeat the question a little bit. It was hard to hear. A little bit of that, please.
Eric Spector (Senior Equity Research Associate of Banks)
Just wondering on the deposit side of the coin, whether you get a sense of just trends in the quarter. What was the drivers of core deposit growth? You talked about how it's shaping up early in 3Q, and if you expect growth from existing clients versus whether you're having success tracking new client account growth.
Edward Czajka (EVP and CFO)
All right. I'll take a stab at it here. First off, on the non-interest bearing, that appears to have leveled off in terms of what we've been seeing trend-wise, in terms of the decline on the non-interest bearing. That seems to have reversed itself in June. The growth for the quarter is attributed to core deposit growth as opposed to brokered or institutional deposits. Pricing seems to have, as I indicated earlier, pricing seems to have flattened out or is basically at the kind of the apex in terms of our own cost of funds. And then, going forward, as you know, it's difficult to predict deposit growth going forward.
But I would venture to say, because of what we're doing, from a tactical standpoint, new offices and new officers, I would like to think majority of our growth going forward will be from new clients, as opposed to existing clients increasing their balances.
Eric Spector (Senior Equity Research Associate of Banks)
... Got it. That, that's helpful. And then interest-bearing demand balances seem to increase pretty meaningfully. Can you just talk about whether that growth is from existing clients or, is that migration? And, and just curious, what rates are there?
Edward Czajka (EVP and CFO)
I'm sorry, I didn't get the question again. I'm sorry. I know it's non-interest-bearing deposits, so I'm having a hard time hearing you.
Eric Spector (Senior Equity Research Associate of Banks)
Yeah, so, is this, is this better now?
Edward Czajka (EVP and CFO)
Yes.
Eric Spector (Senior Equity Research Associate of Banks)
All right. Interest-bearing demand deposits, it seemed to increase pretty meaningfully during the quarter. Just curious if that growth is from existing clients or new account growth or whether that was migration. I'm just kind of curious what rates are there relative to the portfolio.
Edward Czajka (EVP and CFO)
That's a combination of both. We do, we do see obviously people moving from non-interest-bearing to interest-bearing due to the rate environment. Although that, as I said, that migration pattern seems to have slowed down significantly.
Eric Spector (Senior Equity Research Associate of Banks)
Got it. And then lastly, just on capital priorities and then I'll step back. You've been active repurchasing stock. You increased the dividend this past year. Just curious how you view buybacks in light of your improved currency? And just curious, your thoughts on further de novo expansion opportunities and just kind of general commentary on capital priorities would be helpful.
Edward Czajka (EVP and CFO)
Well, as always has been the case for us, our primary focus first on capital allocation is organic growth, second, dividends, third, buyback, and fourth would be anything from a strategic standpoint, and I don't think that's really changed at this point. The repurchase we did, most of it occurred during the latter part of 2023, at an average price of just under $60. With where we're trading at today, we're gonna be a lot more circumspect about going forward on the repurchase.
Li Yu (Chairman and CEO)
Hello?
Edward Czajka (EVP and CFO)
Are you there?
Li Yu (Chairman and CEO)
Are you there?
Edward Czajka (EVP and CFO)
Hello.
Eric Spector (Senior Equity Research Associate of Banks)
That's helpful. Thanks for answering my questions. I'll step back.
Operator (participant)
Once again, if you would like to ask a question, please press star and one. Our next question comes from-- is a follow-up question from Matthew Clark at Piper Sandler. Please go ahead with your follow-up.
Matthew Clark (Managing Director)
Hey, just wanted to ask about the net charge-offs and, you know, how much of that $9 million was related to those two C&I loans? It seems like that's where the losses were incurred. I know they were previously reserved against, but just wanted to get a sense for how much of that was tied to those two loans, and if you could give us some more color as to the types of credits those are, other than being C&I, and kind of what the resolution process looks like.
Li Yu (Chairman and CEO)
Well, the charge-off, roughly $7.5 million out of the $9 million related to these, to the one C&I loans, okay? And so basically, that's a charge-off, I mean. Well, I guess another $2.5 million was related to a previously resolved real estate loans.
Matthew Clark (Managing Director)
Okay. But the types of the business, I guess that these, the two businesses that these are related to, I'm just trying to get a sense for what types of businesses these are, and—
Li Yu (Chairman and CEO)
It's not related to... It's a very fast different, you know, these two businesses.
Matthew Clark (Managing Director)
Okay. Okay, sounds good. And then just back on, the question about the CD repricing and kind of what's coming up for renewal. Are the renewal rates 5%, or that's what they're maturing at? I'm trying to get a sense for kind of the differential.
Edward Czajka (EVP and CFO)
Oh, yeah. No, they're maturing at 5. And as we see, you know, market rates and our offered rates start to come down, that's why I think we're, as I said, we're at the apex here.
Matthew Clark (Managing Director)
What's your current offering rate? Where are they starting to renew this quarter, this month?
Edward Czajka (EVP and CFO)
Depends on the term. It goes anywhere from the 3s up to 5, but that's a longer term, and that's definitely not picked by our clients.
Matthew Clark (Managing Director)
Okay. Sounds good. Thank you.
Operator (participant)
Our next question is also a follow-up from Andrew Terrell from Stephens. Please go ahead with your follow-up.
Andrew Terrell (Managing Director)
Hey, thank you. If I could just follow up again on the C&I charge-offs and take another stab. Just, can you talk to what specifically drove, I guess, the deteriorating fundamentals of the companies for the loans that you charged off? Just trying to get a better sense of kind of what happened there.
Li Yu (Chairman and CEO)
Well, Nick, do you want to take care of that question?
Yeah.
Nick Pi (Chief Credit Officer)
Yeah. These two credits actually were. There will be—there should be some recovery later on, because we are waiting for some of the litigation process. Because one of the loans, we have arbitration pretty soon in either third quarter or early part of fourth quarter. So, the loan fully guaranteed by individual guarantor with very strong financial conditions. So, that's one of them. And the other one also, we do have the judgment on this credit, and we're doing post-judgment examination at this time. So hopefully, for both of them, we can get some recovery from the quarters coming.
Li Yu (Chairman and CEO)
As you can see, we charge off everything. I mean, we have fully reserved everything, hopefully that the legal proceeding has produced some results for us.
Andrew Terrell (Managing Director)
Okay, thanks for the question.
Operator (participant)
Ladies and gentlemen, at this time, and showing no additional questions, I'd like to turn the floor back over to management for any closing remarks.
Li Yu (Chairman and CEO)
Thank you very much. That, I think that, I must speak for many, many, many of our customer, our industries customers, that we hope that the-- finally, there will be a rate cut soon. And personally, that I do feel that, the Fed has not been proactive in the rate increases. And at least they should learn their lesson to be a little bit proactive on their rate reductions. Okay? And, I mean, so it is only a hope, maybe it's a prayer, but I think many of our borrowers deserve to have lower interest rate now. Thank you very much.