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Edited Transcript of PFBC.OQ earnings conference call or presentation 26-Jan-21 7:00pm GMT

·21 min read

Q4 2020 Preferred Bank Earnings Call LOS ANGELES Jan 26, 2021 (Thomson StreetEvents) -- Edited Transcript of Preferred Bank earnings conference call or presentation Tuesday, January 26, 2021 at 7:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Edward J. Czajka Preferred Bank - Executive VP & CFO * Li Yu Preferred Bank - Chairman, CEO & Corporate Secretary * Wellington Chen Preferred Bank - President & COO ================================================================================ Conference Call Participants ================================================================================ * David Pipkin Feaster Raymond James & Associates, Inc., Research Division - Research Analyst * Nicholas Anthony Cucharale Piper Sandler & Co., Research Division - Director & Senior Research Analyst * Stephen M. Moss B. Riley Securities, Inc., Research Division - Analyst * Timothy Norton Coffey Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts * Jeffrey Haas ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, and welcome to the Preferred Bank Fourth Quarter 2020 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. -------------------------------------------------------------------------------- Jeffrey Haas, [2] -------------------------------------------------------------------------------- Thank you, Andrew. Hello, everyone, and thank you for joining us to discuss Preferred Bank's Financial Results for the Fourth Quarter Ended December 31, 2020. With me today from management are Chairman and CEO, Li Yu; President and Chief Operating Officer, Wellington Chen; Chief Financial Officer, Edward Czajka; 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. -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [3] -------------------------------------------------------------------------------- Thank you very much. Good morning, ladies and gentlemen. I'm very pleased to report fourth quarter of 2020. Preferred Bank's net income was $20.8 million (sic) [$20.9 million] or $1.40 a share. This is a new record for our bank. And on the PTPP or pretax pre-provision basis, 2020 is also a record year of Preferred Bank. This quarter's net income, net interest income and net interest margin are all enhanced or benefited by 2 relatively nonrecurring items. First of all, is the recovery of interest of $473,000. The next one is fees on loans now terminated Main Street Lending Program of $499,000 N.et interest margin came in for the quarter at 3.66%, up 12 basis points better than previous quarter. But without these nonrecurring items, it would have been 3.58%, 4 basis points better. Again, this quarter, the reduction of interest costs or deposit costs, they outpaced the moderation of our loan yield. Looking ahead, we shall have continued interest cost savings in the first quarter as roughly $330 million of time certificate deposits will be repricing for roughly $0.50, 50 basis points savings. For the quarter, net income was negatively affected by a loss on sale of securities of $660,000. For the quarter, loan growth is $86 million or 2.2% sequentially. This is very encouraging after long drought and during the midst of pandemic. We have seen our customers seem to be much more positive on our nation's economy. Fourth quarter loan booking has really picked up. Deposits, however, grew only mildly at $28 million, and as the liquidity of the bank remained very good. Perhaps the most comforting thing to us is the improvement in our credit posture. After nearly years of uncertainty related to the pandemic, we're finally seeing things are getting better. Specifically, deferred loans now reduced to $28 million compared to the peak time of $610 million. But most of these deferments are partial deferments where we're deferring the principle only and continue to collect interest. Total nonaccrual loans now reduced to $20.5 million. 30- to 89-days past due loans, which is usually an early signal on the credit situation, stands at $4.1 million at year end. There were no 90-days past due loans. And total classified loans is now $55 million, which includes a $23 million TDR, which is performing. At December 31, total reserve is 1.6%. We were and we will always be careful regarding our operating expenses. Efficiency ratio, again, came in 29.9% for the quarter. With is the availability of vaccine, although it is quite a chaotic situation in Los Angeles County, but with its availability and with the likelihood of a stimulus package from Washington, we believe things will be much better. And we believe 2021 will be a good year for Preferred Bank. Thank you. I'm ready for your questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) The first question comes from Nick Cucharale of Piper Sandler. -------------------------------------------------------------------------------- Nicholas Anthony Cucharale, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [2] -------------------------------------------------------------------------------- So first, a nice rebound in loan growth this quarter, specifically in CRE balances. Was the production broad-based across your geographies? I'm just trying to get a sense if the activity was specific to one of your markets, given differences in pandemic-related impact across the country. -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [3] -------------------------------------------------------------------------------- For us, it's across -- I mean it's all across, all across. But Wellington, you want to first give some color on that? -------------------------------------------------------------------------------- Wellington Chen, Preferred Bank - President & COO [4] -------------------------------------------------------------------------------- Yes. Nick, this is Wellington. Production is pretty evenly distributed between -- in our geographical footprints. Of course, Southern California, North-Cal, as well as East Coast and New York area. It's very well balanced. -------------------------------------------------------------------------------- Nicholas Anthony Cucharale, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [5] -------------------------------------------------------------------------------- Great. And then secondly, on the margin, I appreciate you calling out the onetime items and the maturity schedule. Even so, you posted core NIM expansion, do you feel like you still have some room for declining liability cost outrun erosion in asset yields for the next couple of quarters? Or is that going to be challenging to maintain? -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [6] -------------------------------------------------------------------------------- Yes, it will be -- liability costs would be where we go -- will be generally on a very positive trend. First of all is the first quarter. I mean we have $330 million of TCD maturing, okay, which will be repriced at probably 50 basis points net, okay? And the second quarter, we may have a little bit of residual effect of the first quarter. But I mean, provided the market interest rate doesn't change due to competition, okay? And very highly likelihood with refinancing our sub-debt, okay? At the end of second quarter, which will result, at today's market condition, reasonably good savings. So we are positive regarding our interest costs outlook. -------------------------------------------------------------------------------- Nicholas Anthony Cucharale, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [7] -------------------------------------------------------------------------------- That's great color. And impressive work on driving the modifications down this quarter. No hotel loans on deferral was especially positive to see. When it comes to asset quality in the current portfolio, what is particularly top of mind for you? What are you guys worried about? -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [8] -------------------------------------------------------------------------------- Well, we -- obviously, we would be worried about the continuous lockdown to -- extending to a long time. We know mostly that people seeking deferment is many of the people have been taking out of their savings. Especially we forgot one group of people, those called landlords, okay? Can property lease to the -- pre-lease to -- either to people that lost their job or lease to the business that's closed and so on. They have been handling for quite a period of time, okay? In our particular case that we're benefited by origination at a low, okay, LTV level. If you look at the table that we're presenting, they're basically in the 60s. And the second low since 95% and 100% or 99% of the loan require a sponsorship, a personal guarantee, okay? And we're very careful about the global cash flow of these personal people. So we have been having some good reduction in costs across other categories. But the people that are still -- have been -- cool people have about 1 year of basically no business, okay? So some -- finally, that needed some help. They've been paying along the way. And finally need some help. -------------------------------------------------------------------------------- Nicholas Anthony Cucharale, Piper Sandler & Co., Research Division - Director & Senior Research Analyst [9] -------------------------------------------------------------------------------- Okay. And then lastly for me, a big step-up in fee income from letters of credit. Do you expect that line to stay elevated at this level in coming quarters or revert back to where it was earlier last year? -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [10] -------------------------------------------------------------------------------- We think it's going to be relatively stable. But Ed and then Wellington, you too, can provide color on that, right? -------------------------------------------------------------------------------- Edward J. Czajka, Preferred Bank - Executive VP & CFO [11] -------------------------------------------------------------------------------- Nick, I believe that looking at our pipeline, about that, I think it will be relatively stable. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- The next question comes from Tim Coffey of Janney. -------------------------------------------------------------------------------- Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [13] -------------------------------------------------------------------------------- Mr. Yu, we look at kind of the loan growth this quarter. Is that a reflection of people getting out the sidelines and getting back to business? Or was this a bit ahead of expectations? -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [14] -------------------------------------------------------------------------------- Well, some of the people, I would say, they're all kind. Some of them are getting off the sidelines, okay? Basically, during the pandemic, it's very, very difficult to do business with new people. But we hear and we have seen new requests coming in. And we -- obviously, we are still in the mode of being -- highly alert mode. But there are some new requests coming in that represent new activities to us. -------------------------------------------------------------------------------- Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [15] -------------------------------------------------------------------------------- Okay. What does this quarter's loan growth tell us about the potential for loan growth next year as states like California start to reopen? -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [16] -------------------------------------------------------------------------------- Well, it is probably -- I wish to have had that crystal ball. It is always difficult to forecast the loan growth, especially quarter-by-quarter, if not anything else. But based on the fourth quarter activities, we have bought a total of outstanding loans, about $300 million new loans in the fourth quarter alone. And this represents $375 million of note amount, which mean the commitment amount. So we hope the effect will carry over for the first quarter, okay? But again, it has factors about when the lockdown will be lifted or partially lifted. Because for us, our people need to really have a very close contact with our customers. So there's some variables with it, and -- but we're generally feeling positive about going forward. -------------------------------------------------------------------------------- Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [17] -------------------------------------------------------------------------------- And the customers you serve and the loans you like to originate, what's the competition level like right now? -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [18] -------------------------------------------------------------------------------- I have some personal observation. Yes. -------------------------------------------------------------------------------- Wellington Chen, Preferred Bank - President & COO [19] -------------------------------------------------------------------------------- Tim, it's Wellington. I think competition is still -- is pretty stiff out there. We have a lot of competitors out there offering very low, low interest rate. We just don't know how they can sustain that going forward. But again, we -- our workforce, we try to maintain discipline. As Mr. Yu mentioned earlier, be selective and really just continue -- I mean it's always been the nature of our business throughout the history. So we just have to continue to work faster, more efficient. -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [20] -------------------------------------------------------------------------------- Tim, we're now facing a whole lot of competition from banks, $50 million to $150 million within our territories, okay? That -- it seems to be that our customers are basically high net worth individuals being thought after so they can also give other business for them. For instance, that we're finding people that giving our -- refinance our loan at low 3%, 10-year, fixed rate, okay? And that is below our net interest margin, okay? While we are obviously admiring their capability of doing that, the many loans we decided not to match. -------------------------------------------------------------------------------- Timothy Norton Coffey, Janney Montgomery Scott LLC, Research Division - Director of Banks and Thrifts [21] -------------------------------------------------------------------------------- Yes. That's very helpful. And that is the customer I was curious about. And then looking at expenses, if the economy starts to reopen, is there going to be the potential for upward pressure on expenses from additional traveling and marketing? -------------------------------------------------------------------------------- Edward J. Czajka, Preferred Bank - Executive VP & CFO [22] -------------------------------------------------------------------------------- Tim, this is Ed. Looking forward, in terms of noninterest expense, to the extent profitability improves in 2021 over 2020, you will see the salary and benefits expense increase over the year because our bonus accrual is directly tied to the profitability of the bank. So that will go up. More specifically, to your point about reopening and travel costs and so forth. They're really not terribly significant for us as an entire company, simply because our workforce relative to our asset size is still relatively small. So when you look at the line items specifically, where we have actually benefited this year, it's in business development and promotion as well as office supplies and equipment. And you'll see those line items actually went down year-over-year. So that's really where the benefit comes in. But outside of that, there's not a tremendous amount of benefit for us in terms of the lockdown. And then going forward in terms of increasing noninterest expense with an opening up, we will have some increased expenses, but it won't be material. -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [23] -------------------------------------------------------------------------------- Tim, I'd like to tell you something here, that the management team here is in the growth pasture again because we feel pretty good about 2021. So likely, we will step up our effort in looking for new locations or new branches and new different things, okay? So likely somewhere along the year, our personnel expenses, we'll be increasing our production personnel. And obviously, those usually lead to -- if we're successful to a larger long-term benefit. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- The next question comes from David Feaster of Raymond James. -------------------------------------------------------------------------------- David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [25] -------------------------------------------------------------------------------- I just wanted to follow-up on your last comment about new offices. And just curious, are there any new markets that you might be interested in organic expansion into? And just kind of how are you thinking about that in terms of that organic expansion side? -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [26] -------------------------------------------------------------------------------- Yes. We -- first of all, I've always said one is that, okay, all organic market counts. With -- whether we can lend the team of producers. We usually -- whenever we found the able banker, then we round him up with a team of supporting casts, then start a business sale. That goes along with every branch that we have opened even in the neighborhood of Los Angeles area. And even consider about the California area, we have so many new spots, which are not represented by us, which represent vibrant business centers. Our hard work really is the locating of people. So whenever we see this opportunity, it will be new organic or new trees being brought on. -------------------------------------------------------------------------------- David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [27] -------------------------------------------------------------------------------- Okay. Okay. And then in terms of asset quality, I mean, you guys have continued to improve. Your defensive posture has proven itself. We've actually seen the reserve ratio continue to grow. I guess just in light of the improved economic outlook and improved credit quality, how do you think about the opportunity to potentially release reserves? And maybe at what point would you think you'd be comfortable doing so? And then what's kind of like that more normalized reserve ratio? Is it closer to 125%, which we saw in the first quarter of '20? Is that kind of where we should be looking at? -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [28] -------------------------------------------------------------------------------- Well, I'm looking at the trend, okay? So if asset quality remain -- I mean not turning to the worst, okay? I can see, first of all, is a reduction of provision, perhaps very minimum provision. And then somewhere along the year, I can see that we may be able to release some of the reserves, okay? But it depends on how the situation plays out, and also, to some extent, with the growth rate we will have, okay? It also affect the situation. But generally speaking, is that based on what we are today at this point in time, I can see the whole year's provision expense will be very little, comparatively speaking. -------------------------------------------------------------------------------- David Pipkin Feaster, Raymond James & Associates, Inc., Research Division - Research Analyst [29] -------------------------------------------------------------------------------- Okay. That makes sense. And then just -- I'm just curious, historically, you guys have been pretty asset sensitive. And I'm just curious how that stands today, just in light of the liquidity and the impact of floors? And maybe how your assets asset sensitivity is changed? And then just how you are thinking about managing your sensitivity going forward? -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [30] -------------------------------------------------------------------------------- Ed, you and I share this question, how's that? -------------------------------------------------------------------------------- Edward J. Czajka, Preferred Bank - Executive VP & CFO [31] -------------------------------------------------------------------------------- Sure. -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [32] -------------------------------------------------------------------------------- Okay. You start first. -------------------------------------------------------------------------------- Edward J. Czajka, Preferred Bank - Executive VP & CFO [33] -------------------------------------------------------------------------------- Okay. Well, the interest rate situation is very interesting right now, simply because we have such a divergence between the long and the short end, and the curve seems to be continuing to steepen. But relative to our own balance sheet, you kind of hit the nail on the head. We have a lot of cash, which is very asset sensitive, obviously, on an overnight basis. And then the adjustable rate loans, roughly 80% of the book is floating rate. And so with approximately 70% floors on those. And a number of those -- large -- preponderance of those being below their floors, it will take maybe 1 or 2 to 3. This is very similar to the scenario we had a few years back when we were talking about the same thing, waiting for rates to rise and we had loans below their floors waiting for them to come up above their floors. And then we really saw the acceleration of the yields on the asset side once that took place. But in terms of asset sensitivity, right now, from a quantitative standpoint, it's still -- we're still definitely quite asset sensitive. -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [34] -------------------------------------------------------------------------------- Okay. Obviously, this point in time, the 80% of our -- I mean where loans with floor -- with the floors, floating rate loans, okay? Many of them are always floors, okay? So we are operating currently a little bit under floor, okay? I mean as under floor is higher than the coupon rate, okay? So going forward, I mean, if rate is going to change to the upward, I don't know when that will do that, okay? And maybe perhaps the first 25 to 50 basis points, we will not see some of our loan rise to the new rate. But on the defensive side, on the offsetting side, we have a large $1.6 billion of TCD portfolio. We'll be gradually pricing along the interest rate -- repricing along the interest rate increase. But the 2 of them usually offset somewhat to each other. The exact is depending on the timing of those things. And we have always been, in our history, try to maintain these aspects very carefully. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- The next question comes from Steve Moss of B. Riley. -------------------------------------------------------------------------------- Stephen M. Moss, B. Riley Securities, Inc., Research Division - Analyst [36] -------------------------------------------------------------------------------- I guess to start off with -- just following up on yields here. Just kind of curious what were origination yields for the quarter in terms of pricing these days? -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [37] -------------------------------------------------------------------------------- Okay. For the quarter, we are originating the loans, okay? In the pricing, I have the handy right with me right now, okay? With the average rate in 4.85%, okay? So the -- as you -- in the same quarter, you have payoffs, okay? Payoffs are a little bit higher, about 30 basis points higher. That is one of the main reasons why you have more moderate yield compression. -------------------------------------------------------------------------------- Stephen M. Moss, B. Riley Securities, Inc., Research Division - Analyst [38] -------------------------------------------------------------------------------- Okay. That's helpful. And then on the CD side, kind of curious as to where you're offering rates there these days. -------------------------------------------------------------------------------- Edward J. Czajka, Preferred Bank - Executive VP & CFO [39] -------------------------------------------------------------------------------- Steve, this is Ed. On a 1-year CD, our offering rate is right around 50 basis points. And that kind of holds true down through the 6 month and 3 months probably as well. It's become a market that doesn't care terribly a lot about terms in terms of 1 year, 2 years, 6 months right now. -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [40] -------------------------------------------------------------------------------- Steve, you didn't notice that the first quarter, we had loss on TCDs, okay? And that is because we decided not to match those maturing TCDs. The bank is too liquid in my opinion at this point in time. And so much cash sitting in earning 10 basis points from Fed, okay? So those are the really more strategic moves. -------------------------------------------------------------------------------- Stephen M. Moss, B. Riley Securities, Inc., Research Division - Analyst [41] -------------------------------------------------------------------------------- Right. Okay. That's helpful. And then in terms of capital here, building this quarter, it seems like it's going to continue to build in 2021. Just kind of curious as to what your thoughts are on the potential for capital deployment? -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [42] -------------------------------------------------------------------------------- Yes. First of all, as we continue to run this kind of level of earnings, hopefully, there may be even be slight improvement sometime in 2021. We obviously will be thinking about increasing the dividend. That's almost -- I think that we have dedicated that we will recommend to the Board, okay? Now the next thing is, obviously, as we're always weighing is the organic loan growth, okay? If we have the organic growth loans, let's say, we're lucky enough to return to 2-years ago, getting in the teens, okay? Then the redeployment capital basically will be largely through using the loan growth in the area. If we cannot have organic loan growth that we will be looking at a situation like a buyback, okay? But all this is studying. I'm right now studying what if we have a buyback immediately okay? What effect it will do to us in our current capital level? You see our primary capital level is slightly over 10%. So that is one area that we're studying and to see how comfortable we are. -------------------------------------------------------------------------------- Operator [43] -------------------------------------------------------------------------------- And this concludes our question-and-answer session. I would like to turn the conference over to Li Yu for any closing remarks. -------------------------------------------------------------------------------- Li Yu, Preferred Bank - Chairman, CEO & Corporate Secretary [44] -------------------------------------------------------------------------------- Well, thank you very much that -- for your attention. And as I said earlier, we had a good quarter, and we hope it continues into next year. And hopefully, that all of us will be getting out of this pandemic soon, and we're back to our normal life, get our freedom back, okay, which is probably more important than the performance of the bank or anything. So with that, let's wish for the best for 2021. Thank you. -------------------------------------------------------------------------------- Operator [45] -------------------------------------------------------------------------------- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.