Preferred Bank (PFBC) Q2 2021 Earnings Call Transcript

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Preferred Bank (PFBC -0.52%)
Q2 2021 Earnings Call
Jul 21, 2021, 2:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to the Preferred Bank Second 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.

Jeffrey Haas -- Senior Associate at Financial Profiles

Thanks, Chad. Hello, everyone, and thank you for joining us to discuss Preferred Bank's financial results for the second quarter ended June 30, 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.

Li Yu -- Chairman & Chief Executive Officer

Thank you very much. Good morning, ladies and gentlemen. Preferred Bank's second quarter net income was $21.2 million or $1.44 a share. This quarter, we had some non-recurring items. The first of all is correcting an interest income item which related mostly to 2020 events; and the second one is expensing an amortized discount on a term-loan -- on a sub debt loan that was previously existing which we culled [Phonetic]; and third one is loss on a sale of a loan impairment.

Without these three items, on a normalized basis, our net income would be $1.58 or $1.59 a share and our return on equity will be over 17%. On the same basis, net interest margin for the quarter was 3.47%, a 14 basis points drop from the previous quarter.

Under the low interest rate environment, we're continually witnessing that new loans being made at less of a rate than the old loans paid off and we also have many customer renegotiations on rates. For instance, since we hold lot of SNC loan rates has been renegotiated. Also the large excess liquidity also weighing on the net interest margin.

Our loan however has grown 11% for the quarter. During the quarter, we are seeing a vibrant loan pipeline. But we also see increased payoff activities. Looking ahead, we believe the pipeline will continue to be reasonably satisfactory. This is especially true with many of our newly hired loan officers will be closing loans in the ensuing quarter.

We also see a modest interest cost savings in the quarters, two quarters ahead. Our credit matrix has improved. Classified assets is down. Criticized assets is down. Deferment of loan as of June 30 is only $1.5 million and for all the in shares and principal that we have granted deferment to our borrowers, we have collected back 67% already.

This quarter we have a little bit of charge-offs, but that was charging off the previously reserved loans. So when there is a charge-off, there is a corresponding reduction in reserves paid. This quarter we're recording zero loan loss provision. I must report to you at this time that a conversation I've had with one of our private shareholder yesterday. Specifically, he is questioning me as to why we are not having a loan loss reserve release during the quarter like most, almost every other banks, OK.

I told him, first of all, of course, the CECL's mathematics. But I also told him, from a personal point of view and looking at the glass half full basis that I'm kind of pleased that we didn't have any release this quarter. The most recent economic forecast that was reported by Wall Street Journal yesterday was a forecast by Morgan Stanley's Chief Economist who indicated the economic expansion will continue at a reasonably good rate going into -- well into 2022. We echo her sentiment.

You see, there's not a whole lot we can do about the current low interest rate environment. And there's not a whole lot we can do about the inflation pressure. But we feel we'll be dedicated to continue to provide top-tier profitability to our shareholders.

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

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will be from Matthew Clark with Piper Jaffray. Please go ahead.

Matthew Clark -- Piper Jaffray -- Analyst

Hey, good morning.

Li Yu -- Chairman & Chief Executive Officer

Hi, how do you do?

Matthew Clark -- Piper Jaffray -- Analyst

Good, thanks. First one, just on the loan yields and trying to get a sense for what kind of rates you're getting on new business. I think last quarter you mentioned that new business is coming on about 90 basis points below the portfolio yield. I think your core loan yield this quarter was about 4.99% if we exclude the PPP and the interest income reversal. I guess, what is the weighted average rate on new production this quarter?

Li Yu -- Chairman & Chief Executive Officer

On the new production this quarter that it is -- it is really a sort of like an abnormal quarter. New production yield rate comes in 4.05% where the pre-op rate comes above 60 basis points higher than that, OK. That is because now we have some rather large SNC loans being repriced 50 basis points to 75 basis points lower. So this kind of change the mixture of the thing. Our own portfolio types of loans, we are doing basically right around about 4.3%, 4.4% level.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, great. And then, just on the growth in commercial real estate this quarter, that was most of your incremental growth. Can you give us a sense for the underlying property types that's driving that growth and your thoughts on your ability to maintain low double-digit loan growth into next year, given your pipeline?

Li Yu -- Chairman & Chief Executive Officer

Wellington, do you want to volunteer on that?

Wellington Chen -- President & Chief Operating Officer

Sure. Matthew, this is Wellington. Most of that, we -- what we put out is multifamily residential. We had single or mix-use warehouse type of properties. Lot of warehouse owner [Phonetic].

Matthew Clark -- Piper Jaffray -- Analyst

Okay, understood. Great. And then, the last one maybe for Ed. On the expense run rate going forward and given the build out of the LPO in Texas. Can you give us your thoughts on the run rate going forward whether or not that you might kind of remain at this level or might we see a little bit of growth?

Edward J. Czajka -- Executive Vice President & Chief Financial Officer

Well I would venture to say, I mean we did a, I think a really good job holding it under $15 million this quarter. And as you recall, I've probably guided it a little higher than that in the previous call, and so I'm going to be consistent with that Matthew and say it's going to definitely go up north from here. I would say in the low-to-mid 15, so somewhere in that neighborhood, simply because we have a number of things that are going on, but one of which is hiring that we've been doing.

As we mentioned in the previous call, this has been so far and Wellington should probably talk about that as well, it's been a pretty good year for recruiting this year. So to the extent that happens, salary expense will increase, but we'll see better top line growth as well.

Matthew Clark -- Piper Jaffray -- Analyst

Okay, thank you.

Operator

Thank you. And the next question will come from Andrew Terrell with Stephens. Please go ahead.

Andrew Terrell -- Stephens Inc. -- Analyst

Hey, good morning.

Li Yu -- Chairman & Chief Executive Officer

Hi Andrew.

Wellington Chen -- President & Chief Operating Officer

Hey Andrew.

Andrew Terrell -- Stephens Inc. -- Analyst

Hey, I just wanted to ask, how much of the total portfolio today is considered syndicated or SNCs? And then any kind of specific industry concentration within that?

Edward J. Czajka -- Executive Vice President & Chief Financial Officer

It's about -- I think it's right around the 11% of the book, Matthew [Phonetic]. There are no industry specific concentrations. These are typically credit type facilities for these larger organizations. We do have, as we've talked about in the past, we have about, I believe, $50 million or $60 million in the entertainment industry, but those are not production credits, those are primarily library based.

Andrew Terrell -- Stephens Inc. -- Analyst

Perfect, thank you. And I did want to switch back over to kind of the new hire front, just briefly. Are there any specific geographies you're more focused on hiring or is that really coming at across the board and any kind of incremental color on kind of the type of institution you're hiring away from, is it larger or smaller, similar sized, any color on the hires?

Li Yu -- Chairman & Chief Executive Officer

Andrew, on that, we have previously talked about it. Our hiring is basically opportunistic. So we have [Indecipherable] several regions we have whenever we found a qualified personnel, that we try to get them and if we're lucky enough we then come into terms for them to join us. And it is not specifically we'd have targeting any region at all, rather than all the regions we have we're continuously cultivating people coming to us. Mostly, are talents coming from bank above the -- within the range of our size, they are a little bit smaller than we are or a little bit bigger than we are.

Andrew Terrell -- Stephens Inc. -- Analyst

Perfect, thank you. And then, just last one for me, it looks like the end of period PPP loans were essentially flat to the prior quarter. Just any kind of updated thoughts or expectations on timeline for forgiveness for the remainder of these loans?

Johnny Hsu -- Executive Vice President & Deputy Chief Operating Officer

Andrew, this is Johnny. On the PPP loans, we're going through the forgiveness process right now and we haven't started on the second one yet second batch because that guideline hasn't come out yet, but we still have around $50 million that we're expecting to be forgiven from the first batch.

Andrew Terrell -- Stephens Inc. -- Analyst

Okay, perfect. Thanks for taking my questions.

Li Yu -- Chairman & Chief Executive Officer

Sure.

Operator

The next question will be from Steve Moss with B. Riley Securities. Please go ahead.

Steve Moss -- B. Riley Securities -- Analyst

Good morning.

Li Yu -- Chairman & Chief Executive Officer

Hi.

Edward J. Czajka -- Executive Vice President & Chief Financial Officer

Good morning.

Steve Moss -- B. Riley Securities -- Analyst

Starting off with maybe just the appetite to deploy excess liquidity here, just kind of curious from the release there, how much -- what are you thinking in terms of securities purchases, if any, and just what you may be expecting there?

Li Yu -- Chairman & Chief Executive Officer

In general, we just have too much liquidity. We have roughly 22% of total assets invested in cash on different type obviously that's earning a grant [Phonetic] less than 10 basis points. So know that our effort is to invest them and obviously first choice is loan. But we are looking in the securities side and we actually did some in the second -- I believe, second quarter we started to do it. But as you know the choices has not been -- whole lot of them if you consider risks. So, Ed, do you want to actually -- pluck more on that?

Edward J. Czajka -- Executive Vice President & Chief Financial Officer

Yeah, no Steve it's -- as you know it's a tough time in this rate environment, spreads tightening. So you really don't get paid for going along at all. So what we've been doing is we've been kind of mixing up between cash alternatives, very, very short, monthly adjusters, agencies type stuff and we've put quite a bit into that -- over $100 million into that and then we've been picking off here in their munis and corporates as we find value here and there. But it's -- as you know, it's a long slog. But the mortgage product yields almost 5 times what the overnight IOER rate is. So that certainly helps. But these are base hits, these aren't home runs as you know, so.

Steve Moss -- B. Riley Securities -- Analyst

Okay, alright. No, that makes sense. And then just on the other side of the balance sheet, deposit growth remained strong, just kind of curious as to where you guys are pricing CDs these days and just that deposit environment?

Edward J. Czajka -- Executive Vice President & Chief Financial Officer

Well, the -- I can talk about the pricing, I think Wellington can probably talk about the market, maybe a better word. We're trying to stay -- keep our pricing as low as possible without impacting growth going forward. But as you know, there's a lot of money in the system right now. The Fed has put a lot of money into the system. And so we do want to grow deposits because we'll eventually deploy them, but we've got to do it in a real cost effective manner. We've been working very hard to try to bring those costs down.

Wellington Chen -- President & Chief Operating Officer

Yeah Steve, this is Wellington. We are very selective on our deposit gathering between our Deposit Officer, who are focusing on individual deposit and our Commercial Lending Officer focusing on business, DDA deposit. We just try to be very selective and are continuing to keep our pricing down, our -- the cost down in all that. But having said that, we're always out there looking for good opportunity to build our core deposit.

Li Yu -- Chairman & Chief Executive Officer

Steve, this is Li. One other thing that I hold a slightly different view than Edward gave you now, that I'm an old lion [Phonetic] person that always believes franchise value is in the deposits you build and we build deposits first even though in short term, are a disadvantage. But you have to bite the bullets in order to have the muscle there to head to the long-term growth. So this institution will continue to cultivate deposit not just because it's not profitable right now but really for the long-term stability and the gross value of our franchise.

Steve Moss -- B. Riley Securities -- Analyst

Right. No, absolutely. And in terms of, maybe just tying now your loan expectations here. Li you spoke that things -- pipeline and production should be satisfactory here. Do you think -- back-end loaded this quarter, do you think you hold the pace on loan growth, maybe we could see a little bit of a step-up in the second half of this year?

Li Yu -- Chairman & Chief Executive Officer

We have previously been telling everybody we think this second half of the year will be a little bit more than the first half of the year. But this business is after many, many years, is really kind of hard to predict, especially in the early part of the quarter, much of which we can -- will materialize in the mid-quarter and so on.

But the early indication is that our momentum is there and I will say, I will hope that the new officers will be the added muscle that we needed to bring to higher level than the previous quarters. Of course that we still have probably be careful about the whole thing. I have a Chief Credit Officer sitting right beside me whose sole job is to say, don't do crazy things.

Steve Moss -- B. Riley Securities -- Analyst

All right. Well thank you very much for all that and next quarter.

Operator

And the next question is from Tim Coffey with Janney. Please go ahead.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Thank you. Good morning, everybody. Mr. Li, I wonder if you can provide an update or if you had an update on how the loan growth is going in the Texas operation?

Li Yu -- Chairman & Chief Executive Officer

Well, Texas operation in general has been progressed just along the same line that we are previously forecasting. And I guess previously, have we reported to them how much they were expecting to produce for the year?

Wellington Chen -- President & Chief Operating Officer

No, we have expressed how much they are expecting, but last quarter, they contributed about 10% of our loan growth, yeah.

Li Yu -- Chairman & Chief Executive Officer

Okay. In Texas operation, as you said, volume wise speaking, it obviously very, very satisfactory. I consider the deposits had to go through, but we have to also started to be a little bit choosy about the type because the yield and these kinds of things as we go forward.

Edward J. Czajka -- Executive Vice President & Chief Financial Officer

Well they don't have to battle [Speech Overlap] they don't have to battle the pay-offs new portfolio.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Yes, that's true. And Ed, just going to circle back on the liquidity question. Just philosophically would -- how long do you think you're going to be carrying that excess liquidity?

Edward J. Czajka -- Executive Vice President & Chief Financial Officer

Wow, that's a great question. So, you know what I've always found, first thing, the one of the thing I've always found Tim is when liquidity is really strong is when rates are lowest. Liquidity starts to dry up, our rates go up and you know that always happens. And so it's ebbed and flowed over the last 10 -- we've really held excess liquidity for the last 10 years since the financial crisis ended, quite honestly and it just built and built and built.

And we've never came to a situation where we felt yields were going to finally go down or I guess we could have done it in February, March of last year we were really brilliant, but we've never felt comfortable to be in a situation where rates were going to fall pretty meaningfully and we could put some money to work pretty effectively and make use of that money. So we're just going to keep putting money to work as we can slowly chip away, but we're not going to make huge meaningful inroads.

I mean we, our liquidity went up $150 million on average just in the linked quarter from quarter to quarter. So when you look at that, that's a real deleveraging impact on the margin, but we'll continue to chip away at the money as we can. But we're not going to do anything really substantial.

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Great. Okay. No, that's great color. I appreciate it. Those are my questions. Thank you very much.

Operator

[Operator Instructions] The next question will be from Gary Tenner with D.A. Davidson. Please go ahead.

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Thanks. Good morning. I've got a question, I think most of them have been answered. But regarding the loss on sale loans this quarter I think 261,000, it was closer to 400,000 last quarter. Just any color on that and any visibility as to additional sales as we go through the back half of the year?

Li Yu -- Chairman & Chief Executive Officer

No. I mean, actually it's really a strategic move for our side, because we had a couple of SNC loans being downgraded. And heading into examination, we do not want to [Technical Issues] but it's more so that -- I mean strategic situation rather than financial related. We, as you know, looking at our back history, we don't have -- we sell these out in a long scale.

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Yeah, OK. So, just something that kind of very specific to a couple of credits ahead of an exam.

Li Yu -- Chairman & Chief Executive Officer

Two SNC loans that are being downgraded.

Gary Tenner -- D.A. Davidson & Co. -- Analyst

Great. Thank you.

Operator

And the next question is from David Feaster with Raymond James. Please go ahead.

David Feaster -- Raymond James -- Analyst

Good morning, everybody.

Wellington Chen -- President & Chief Operating Officer

Hi David.

David Feaster -- Raymond James -- Analyst

I just wanted to get a sense of some of the puts and takes with loan growth, just to get a better understanding of some of the underlying trends. I mean, pay-offs and pay-downs have been a significant headwind like we've talked about, just curious if you could quantify like how pay-offs and pay-downs have trended and maybe the underlying strength of your originations? Just some detail there would be helpful.

Li Yu -- Chairman & Chief Executive Officer

So, let me tell you what our origination effort is and I have the numbers right here. For the second quarter, we have originated a total of -- just after our bragging, where are the number? Okay, we've originated $428 million of commitment with outstanding about $305 million, but the payoff is nearly $200 million.

So obviously these number changes from time to time. You see, we are not a product type of the Bank. We are relationship type of -- one-off type of bank. All of our loans -- all of our deposits are really one-off type of thing. So sometime it's just certain customer, I mean sold their property or they went public, they don't need us anymore. All these kind of things happens.

David Feaster -- Raymond James -- Analyst

Okay, that's helpful. And then -- so in our recent meetings, we talked a lot about C&I growth being a major focus and we did see some growth in the quarter. You guys have done a great job expanding C&I. Just curious, any updates on this segment. What you're hearing from your C&I clients and just your strategy for continued C&I growth going forward.

Li Yu -- Chairman & Chief Executive Officer

C&I growth is probably the hardest coming in. You have an officer who even work on the deal may be as long as one to two years before they can get to the C&I, because you're getting [Phonetic] customer transferred to us. Unlike a real estate transaction, it's a little bit more transaction-basis, plus the relationship. But C&I is purely relationship and has a lot to do with timing.

And one other situation is that what we are facing right now is, I'm trying to decide is, on the temporary basis, how should we control our C&I book. You see, C&I is now being price to a level that is -- how should I say, does not fit to our operating model that much. You see -- you talk about the -- I mean regular customer types of C&I, it's basically they price much below the real estate loans. And you talk about the SNC C&I lines [Phonetic] not in 1s, in the low 2s is -- that's the standard of the whole situation.

Realize our net interest margin is right around 3.50%. So I mean, these things is just, if you do a few of them or if you do a whole lot of them on the situation and then your financial performance will be coming down. So we have to, from time to time, adjust our C&I appetite based on the relative yield rates we can get at this point of time is that I'm not projecting to see a whole lot of gigantic C&I loans because it's uneconomical at this point of time.

David Feaster -- Raymond James -- Analyst

Okay and then just any thoughts on the reserve, you touched on this in the -- your prepared remarks, but just any, I guess how do you think about provision expense going forward? Would you kind of expect -- it sounds like you'd prefer to grow into the reserve and any thoughts on kind of what a normalized...

Li Yu -- Chairman & Chief Executive Officer

Yeah, it is not up to us, it is up to the CECL mathematically, you're well aware of. But if I have to make a prediction, because there is a lot of unknown factors for instance the vibrant -- I mean the delta is coming stronger and stronger. So if that's happening very strong, that puts Preferred Bank in a better position. I mean, because we have more reserve compared to some of the vehicle.

But if it is not going up as strong, then I would say there is more than 50% of chance that we will have some reserve going forward, reserve release going forward. But still have to go through the computation of all the economic factor, all the Q factor, all the internal downgrading, grading of the loans and these kind of complicated things there.

David Feaster -- Raymond James -- Analyst

Got it. Thank you.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Li Yu for any closing remarks.

Li Yu -- Chairman & Chief Executive Officer

Thank you very much. Although we had a very noisy quarter, but looking at the normalized basis, we really have a record earning quarter and we'd like to think that all the operating matrix is still intact. We're still the Bank which can produce or have been producing more than 10% loan growth and controlling our cost and have reasonable net interest margin compared to our peer group.

And above all, we have probably a very favorably positioned profitability in ROA, ROE. Certainly, we'd like to continue to do that. The -- we just hope that the economy will be growing at the same condition as we are seeing right now and I would hope the -- I mean pandemic will be over soon and I certainly will hope everybody would stay safe and stay healthy. Thank you very much.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Jeffrey Haas -- Senior Associate at Financial Profiles

Li Yu -- Chairman & Chief Executive Officer

Wellington Chen -- President & Chief Operating Officer

Edward J. Czajka -- Executive Vice President & Chief Financial Officer

Johnny Hsu -- Executive Vice President & Deputy Chief Operating Officer

Matthew Clark -- Piper Jaffray -- Analyst

Andrew Terrell -- Stephens Inc. -- Analyst

Steve Moss -- B. Riley Securities -- Analyst

Timothy Coffey -- Janney Montgomery Scott -- Analyst

Gary Tenner -- D.A. Davidson & Co. -- Analyst

David Feaster -- Raymond James -- Analyst

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